UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 20132014
Commission file number: 001-13337
STONERIDGE, INC.
(Exact name of registrant as specified in its charter)
Ohio | 34-1598949 | |||
(State or other jurisdiction of | (I.R.S. Employer | |||
incorporation or organization) | Identification No.) |
9400 East Market Street, Warren, Ohio | 44484 | |||
(Address of principal executive offices) | (Zip Code) |
(330) 856-2443 | ||
Registrant’s telephone number, including area code | ||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Shares, without par value | New York Stock Exchange |
Securities registered pursuant to section 12(g) of the Act:None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
¨o Yesx No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
¨o Yesx No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yeso No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
x Yeso No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
ox
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filero | Accelerated filerx | Non-accelerated filero | Smaller reporting companyo | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
o Yesx No
As of June 30, 2013,2014, the aggregate market value of the registrant’s Common Shares held by non-affiliates of the registrant was approximately $299.5$278.3 million. The closing price of the Common Shares on June 30, 20132014 as reported on the New York Stock Exchange was $11.64$10.72 per share. As of June 30, 2013,2014, the number of Common Shares outstanding was 28,487,015.28,243,997.
The number of Common Shares outstanding as of February 28, 20142015 was 28,329,697.27,970,905.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 2014,12, 2015, into Part III, Items 10, 11, 12, 13 and 14.
INDEX
101 | XBRL Exhibits: |
101.INS | XBRL Instance Document |
101.SCH | XBRL Schema Document |
101.CAL | XBRL Calculation Linkbase Document |
101.DEF | XBRL Definition Linkbase Document |
101.LAB | XBRL Labels Linkbase Document |
101.PRE | XBRL Presentation Linkbase Document |
i |
Overview
Founded in 1965, Stoneridge, Inc. (the “Company”) is a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, vehicle, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets. Our products and systems are critical elements in the management of mechanical and electrical systems to improve overall vehicle performance, convenience and monitoring in areas such as emissions control, fuel efficiency, safety, security and infotainment. Our extensive footprint encompasses more than 25 locations in 1512 countries and enables us to supply global and regional automotive, commercial, vehicle, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle manufacturers around the world.
Our custom-engineered products and systems are used to activate equipment and accessories, monitor and display vehicle performance and control, distribute electrical power and signals and provide vehicle security and convenience. Our product offerings consist of (i) sensors, (ii) application-specific actuators, switches and valves (iii) vehicle instrumentationand driver information systems, (ii)(iv) vehicle management electronics, (iii) sensors, (iv)(v) power and switch distribution modules and telematics, (vi) security alarms and vehicle tracking devices and monitoring services (v) convenience accessories, (vi) power and signal distribution products and systems and (vii) application-specific switches and actuators.convenience accessories. We supply the majority of our products, predominantly on a sole-source basis, to many of the world’s leading commercial vehicle and automotive original equipment manufacturers (“OEMs”), and select non-vehicle OEMs, as well as certain commercial vehicle and automotive tier one suppliers. These OEMs are increasingly utilizing electronic technology to comply with more stringent regulations (particularly emissions and safety) and to meet end-user demand for improved vehicle performance and greater convenience. As a result, per-vehicle electronic content has been increasing. Our technology and our partnership-oriented approach to product design and development enables us to develop next-generation products and to excel in the transition from mechanical-based components and systems to electrical and electronic components, modules and systems.
During the second quarter of 2014, the Company entered into an asset purchase agreement to divest its Wiring business including substantially all of its assets and liabilities. The sale was completed on August 1, 2014. The Wiring business is classified as discontinued operations for all periods presented in the Company’s financial statements herein, and therefore is excluded from both continuing operations and segment results for all periods presented. The Wiring business designed and manufactured wiring harness products and assembled instruments panels for sale principally to the commercial, agricultural and off-highway vehicle markets.
Segments and Products
We conduct our business in fourthree reportable segments which are the same as our operating segments: Control Devices, Electronics Wiring and PST.
Control Devices.Our Control Devices segment designs and manufactures products that monitor, measure or activate specific functions within a vehicle. This segment includes product lines such as sensors, switches, valves and actuators, as well as other electronic products.actuators. Sensor products are employed in major vehicle systems such as the emissions, safety, powertrain, braking, climate control, steering and suspension systems. Switches transmit signals that activate specific functions. Our switch technology is principally used in two capacities, user-activated and hidden. User-activated switches are used by a vehicle’s operator or passengers to manually activate headlights, rear defrosters and other accessories. Hidden switches are not typically visible to vehicle operators or passengers and are engaged to activate or deactivate selected functions as part of normal vehicle operations, such as brake lights. In addition, our Control Devices segment designs and manufactures electromechanical actuator products that enable OEMs to deploy power functions in a vehicle and can be designed to integrate switching and control functions. We sell these products principally to the automotive market as well as the commercial vehicle and agricultural markets.
Electronics.Our Electronics segment designs and manufactures electronic instrument clusters, electronic control units and driver information systems. These products collect, store and display vehicle information such as speed, pressure, maintenance data, trip information, operator performance, temperature, distance traveled and driver messages related to vehicle performance. In addition, power distribution modules and systems regulate, coordinate, monitor and direct the operation of the electrical system within a vehicle. These products use state-of-the-art hardware, software and multiplexing technology and are sold principally to the commercial vehicle market.
Wiring.Our Wiring segment designs and manufactures electrical power and signal distribution products and systems, primarily wiring harnesses and connectors. These products are sold principally to the commercial, agricultural and off-highway vehicle markets. We also assemble entire instrument panels for the commercial vehicle market that are configured specifically to the OEM customer’s specifications.
PST.OurPST segment, which primarily serves the South American market, specializes in the design, manufacture and sale of electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices primarily for the automotive and motorcycle industry. This segment includes product lines such as alarms, convenience applications, vehicle monitoring and tracking devices and infotainment systems. These products improve the performance, safety and convenience features of our customers’ vehicles. PST sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers.
The following table sets forth for the periods indicated, the percentage of net sales attributable to our reportable segments and product categories for the years ended December 31:
Segment | Product Category | 2013 | 2012 | 2011 | Product Category | 2014 | 2013 | 2012 | ||||||||||||||||||||
Control Devices | Sensors, switches, valves and actuators | 31 | % | 29 | % | 33 | % | Sensors, switches, valves and actuators | 47 | % | 44 | % | 44 | % | ||||||||||||||
Electronics | Electronic instrumentation and information display products | 20 | % | 17 | % | 24 | % | Electronic instrumentation and information display products | 32 | % | 29 | % | 27 | % | ||||||||||||||
Wiring | Vehicle electrical power and distribution products and systems | 30 | % | 35 | % | 43 | % | |||||||||||||||||||||
PST | Security alarms, vehicle tracking devices and monitoring services and convenience accessories | 19 | % | 19 | % | - | % | Security alarms, vehicle tracking devices and monitoring services and convenience accessories | 21 | % | 27 | % | 29 | % |
Our products and systems are sold to numerous OEM and tier one supplier customers, in addition to aftermarket distributors and mass merchandisers, for use on many different vehicle platforms. We supply multiple parts to many of our principal OEM and tier one customers under requirements contracts for a particular vehicle model. These contracts range in duration from one year to the production life of the model, which commonly extends for three to seven years.
The following table sets forth for the periods indicated, the percentage of net sales derived from our principle end markets:markets for the years ended December 31:
Years ended December 31 | 2013 | 2012 | 2011 | |||||||||||||||||||||
Principle End Markets | 2014 | 2013 | 2012 | |||||||||||||||||||||
Automotive | 37 | % | 35 | % | 34 | % | ||||||||||||||||||
Commercial vehicle | 39 | % | 40 | % | 53 | % | 36 | 33 | 30 | |||||||||||||||
Automotive | 24 | 22 | 27 | |||||||||||||||||||||
Aftermarket distributors and mass merchandisers | 21 | 27 | 29 | |||||||||||||||||||||
Agricultural and other | 18 | 19 | 20 | 6 | 5 | 7 | ||||||||||||||||||
Aftermarket distributors and mass merchandisers | 19 | 19 | - | |||||||||||||||||||||
Total | 100 | % | 100 | % | 100 | % |
For further information related to our reportable segments and financial information about geographic areas, see Note 12 to the consolidated financial statements.
Production Materials
The principal production materials used in the manufacturing process for our reportable segments include: copper wire and cables, electrical connectors, molded plastic components and resins, instrumentationcopper, precious metals and certain electrical components such as printed circuit boards, semiconductors, microprocessors, memory devices, resistors, capacitors, fuses, relays and infotainment devices. We purchase such materials pursuant to both annual contract and spot purchasing methods. Such materials are available from multiple sources, but we generally establish collaborative relationships with a qualified supplier for each of our key production materials in order to lower costs and enhance service and quality. As global demand for our production materials increases, we may have difficulties obtaining adequate production materials from our suppliers to satisfy our customers. Any extended period of time for which we cannot obtain adequate production material or which we experience an increase in the price of production material could materially affect our results of operations and financial condition.
Patents, Trademarks and Intellectual Property
We maintain and have pending various U.S. and foreign patents, trademarks and other rights to intellectual property relating to the reportable segments of our business, which we believe are appropriate to protect the Company's interests in existing products, new inventions, manufacturing processes and product developments. We do not believe any single patent is material to our business, nor would the expiration or invalidity of any patent have a material adverse effect on our business or ability to compete. We are not currently engaged in any material infringement litigation nor are there anyrelated to material infringement claims pending by or againstother than one matter related to our Electronics segment which we believe is without merit. See additional details of the Company.alleged patent infringement in Note 10 to the consolidated financial statements.
Industry Cyclicality and Seasonality
The markets for products in our reportable segments have been cyclical. Because these products are used principally in the production of vehicles for the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highwayvehicle markets, revenues and therefore results of operations, are significantly dependent on the general state of the economy and other factors, like the impact of environmental regulations on our customers, which affect these markets. A decline in automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle production of our principal customers could adversely impact the Company. Seasonality has some impact on the operations of our Electronics Wiring and Control Devices segments. The demand for our PST segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.
Customers
We are dependent onhave several customers which account for a significant percentage of our sales. The loss of any significant portion of our sales to these customers, or the loss of a significant customer, would have a material adverse impact on our financial condition and results of operations. We supply numerous different parts to each of our principal customers. Contracts with several of our customers provide for supplying their requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. These contracts are subject to potential renegotiation from time to time, which may affect product pricing and generally may be terminated by our customers at any time. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or group of related models sold by any of our major customers could have a material adverse impact on the Company. We may also enter into contracts to supply parts, the introduction of which may then be delayed or cancelled. We also compete to supply products for successor models and are therefore subject to the risk that the customer will not select the Company to produce products on any such model, which could have a material adverse impact on our financial condition and results of operations. In addition, we sell products to other customers that are ultimately sold to our principal customers. Due to the competitive nature of the markets we serve, in the ordinary course of business we face pricing pressures from our customers. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations may be adversely affected.
The following table presents our principal customers, as a percentage of net sales:
Years ended December 31 | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
Deere & Company | 14 | % | 13 | % | 15 | % | ||||||||||||||||||
Navistar International Corporation | 13 | 18 | 24 | |||||||||||||||||||||
Ford Motor Company | 7 | 5 | 6 | 11 | % | 10 | % | 8 | % | |||||||||||||||
Scania Group | 6 | 4 | 5 | 8 | 8 | 6 | ||||||||||||||||||
Daimler | 5 | 4 | 5 | 6 | 6 | 5 | ||||||||||||||||||
General Motors Company | 4 | 4 | 5 | 5 | 6 | 5 | ||||||||||||||||||
Volvo | 5 | 4 | 4 | |||||||||||||||||||||
Other | 51 | 52 | 40 | 65 | 66 | 72 | ||||||||||||||||||
Total | 100 | % | 100 | % | 100 | % |
Backlog
Our products are produced from readily available materials and have a relatively short manufacturing cycle; therefore our products are not on backlog status. Each of our production facilities maintains its own inventories and production schedules. Production capacity is adequate to handle current requirements and can be expanded to handle increased growth if needed.
Competition
The markets for our products in our reportable segments are highly competitive. The principal methods of competition are technological innovation, price, quality, performance, service and delivery. We compete for new business both at the beginning of the development of new models and upon the redesign of existing models for OEM customers. New model development generally begins two to five years before the marketing of such models to the public. Once a supplier has been selected to provide parts for a new program, an OEM customer will usually continue to purchase those parts from the selected supplier for the life of the program, although not necessarily for any model redesigns. We compete for aftermarket and mass merchandiser sales based on price, product functionality, quality and service.
Our diversity in products creates a wide range of competitors, which vary depending on both market and geographic location. We compete based on strong customer relations and a fast and flexible organization that develops technically effective solutions at or below target price. We compete against the following primary competitors:
Control Devices.Our primary competitors include BorgWarner, Inc., Bosch, Continental AG, Delphi Automotive PLC, Denso Corporation, Electricfil, Hella KGaA Hueck & Co., Methode Electronics,Measurement Specialties, Inc., Preh GmbH, Sensata, TRW Automotive Holdings Corp.NTK Technologies, Inc. and Visteon.Sensata.
Electronics.Our primary competitors include Actia Group, Ametek, Inc., Bosch, Commercial Vehicle Group, Continental AG, Delphi Automotive PLC, Dongfeng Electronics Technology Co., Ltd., Hella KGaA Hueck & Co., Magneti Marelli S.p.A. and Yazaki Corporation.
Wiring.Our primary competitors include Commercial Vehicle Group, Delphi Automotive PLC, Leoni, Nexans SA and PKC Group.
PST.Our primary competitors include Autolift, Autotrac, Brose, Car System, Graber,Ceabs, Cerruns, Ituran, JVC/Kenwood Corporation, Lennox, M. Magneti Marelli S.p.A., MultiLaser, Quantum, Olimpus, Sascar, Segma, Sistec, TechcarPioneer Corporation, Michelin and Tragial.Sistec.
Product Development
Our research and development efforts for our reportable segments are largely product design and development oriented and consist primarily of applying known technologies to customer requests. We work closely with our customers to creatively solve customer requests using innovative approaches. The majority of our development expenses are related to customer-sponsored programs where we are involved in designing custom-engineered solutions for specific applications or for next generation technology. To further our vehicle platform penetration, we have also developed collaborative relationships with the design and engineering departments of key customers. These collaborative efforts have resulted in the development of new and complimentary products and the enhancement of existing products.
Our development work is largely performed on a decentralized basis. We have engineering and product development departments organized by market. To ensure knowledge sharing among decentralized development efforts, we have instituted a number of mechanisms and practices whereby innovation and best practices are shared. The decentralized product development operations are complimented by larger technology groups in Canton, Massachusetts; Lexington, Ohio; Stockholm, Sweden; Pune, India; Manaus, Brazil; and São Paulo, Brazil. In addition, during 2010 we opened a product development center inBrazil; and Shanghai, China, to focus on the developing Chinese market.China.
We use efficient and quality oriented work processes to address our customers’ high standards. Our product development technical resources include a full complement of computer-aided design and engineering (“CAD/CAE”) software systems, including (i) virtual three-dimensional modeling, (ii) functional simulation and analysis capabilities and (iii) data links for rapid prototyping. These CAD/CAE systems enable us to expedite product design and the manufacturing process to shorten the development time and ultimately time to market.
We have further strengthened our electrical engineering competencies through investment in equipment such as (i) automotive electro-magnetic compliance test chambers, (ii) programmable automotive and commercial vehicle transient generators, (iii) circuit simulators and (iv) other environmental test equipment. Additional investment in 3-D printing product machining equipment has allowed us to fabricate new product samples in a fraction of the time required historically. Our product development and validation efforts are supported by full service, on-site test labs at most manufacturing facilities, thus enabling cross-functional engineering teams to optimize the product, process and system performance before tooling initiation.
We have invested, and will continue to invest in technology to develop new products for our customers. Product development costs incurred in connection with the development of new products and manufacturing methods, to the extent not recoverable from the customer, are charged to selling, general and administrative expenses,expensed as incurred. Such costs amounted to approximately $45.3$41.6 million, $44.8$40.4 million and $35.3$38.9 million for 2014, 2013 2012 and 2011,2012, respectively, or 4.8%6.3%, 4.8%6.1% and 4.6%6.4% of net sales for these periods.
We will continue shifting our investment spending toward the design and development of new products rather than focusing on sustaining existing product programs for specific customers, which allows us to sell our products to multiple customers. The typical product development process takes three to five years to show tangible results. As part of our effort to shift our investment spending, we reviewed our current product portfolio and adjusted our spending to either accelerate or eliminate our investment in these products based on our position in the market and the potential of the market and product.
Environmental and Other Regulations
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things, emissions to air, discharge to water and the generation, handling, storage, transportation, treatment and disposal of waste and other materials. We believe that our business, operations and facilities have been and are being operated in compliance, in all material respects, with applicable environmental and health and safety laws and regulations, many of which provide for substantial fines and criminal sanctions for violations.
Employees
As of December 31, 2013,2014, we had approximately 9,3004,200 employees, approximately 3,40066% of whom were salaried andlocated outside the balance of whom were paid on an hourly basis.United States. Although we have no collective bargaining agreements covering U.S. employees, certaina significant number of employees located in Brazil, Estonia, France, Mexico, Spain, Sweden, and the United Kingdom either (i) are represented by a union and are covered by a collective bargaining agreement or (ii) are covered by works council or other employment arrangements required by law. We believe that relations with our employees are good.
Equity Investments and Joint Ventures
We make equity investments and form joint ventures in order to achieve several strategic objectives, including (i) diversifying our business by expanding in high-growth regions, (ii) employing complementary design processes, growth technologies and intellectual capital and (iii) realizing cost savings from combined sourcing.
We had a joint venture in Brazil, PST Eletrônica Ltda. (“PST”), which is now a consolidated subsidiary, and have an equity investment in India, Minda Stoneridge Instruments Ltd. (“Minda”), and continue to explore similar business opportunities in other global markets. As of and for the years ended December 31, 2014, 2013 and 2012, our controlling interest in PST was 74% and our interest in Minda was 49%.
We entered into our PST joint venture in October 1997, acquiring a 50% interest. On December 31, 2011, we acquired an additional 24% interest. Prior to the acquisition of the additional interest, PST was accounted for using the equity method of accounting. Subsequent to the acquisition of controlling interest, PST became a consolidated subsidiary of the Company. We entered into our Minda joint venture in August 2004 and increased our investment from 20% to 49% in 2006, this investment is accounted for using the equity method of accounting.
PST specializes in the design, manufacture and sale of electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices. PST sells its products through the aftermarket distribution channel, to factory authorized dealer installers, also referred to as original equipment services, direct to OEMs and through mass merchandisers. PST’s sales are to customers in South America.
Minda manufactures electromechanical/electronic instrumentation equipment and sensors primarily for the automotive, motorcycle and commercial vehicle markets. We leverage our investment in Minda by sharing our knowledge and expertise in electrical components and systems and expanding Minda’s product offering through the joint development of our products designed for the market in India.
Our equity investments and joint ventures have contributed positively to our financial results in 2013, 2012 and 2011. Equity earnings are summarized in the following table (in thousands):
Years ended December 31 | 2013 | 2012 | 2011 | |||||||||
PST(A) | $ | - | $ | - | $ | 8,805 | ||||||
Minda | 476 | 760 | 1,229 | |||||||||
Total equity earnings of investees | $ | 476 | $ | 760 | $ | 10,034 |
Executive Officers of the Company
Each executive officer of the Company serves the Board of Directors at its pleasure. The Board of Directors appoints corporate officers annually. The executive officers for reporting purposes under the Securities and Exchange Act of 1934, as amended, of the Company are as follows:
Name | Age | Position | ||
John C. Corey | President, Chief Executive Officer and Director | |||
George E. Strickler | Executive Vice President, Chief Financial Officer and Treasurer | |||
Richard P. Adante | Vice President of Operations | |||
Thomas A. Beaver | Vice President of the Company and President of Global Sales | |||
Sergio de Cerqueira Leite | Director President of PST Eletrônica Ltda. | |||
Charles A. Di Staulo | Vice President of Human Resources | |||
Peter Kruk | President of the Electronics Division | |||
Michael D. Sloan | Vice President of the Company and President of the Control Devices Division |
John C. Corey, President, Chief Executive Officer and Director.Mr. Corey has served as President and Chief Executive Officer since January 2006. Mr. Corey has served as a Director on the Board of Directors since January 2004. Prior to his employment with the Company, Mr. Corey served from October 2000, as President and Chief Executive Officer and Director of Safety Components International, a supplier of airbags and components, with worldwide operations. Mr. Corey has served as a Director and Chairman of the Board of Haynes International, Inc., a producer of metal alloys, since 2004.
George E. Strickler, Executive Vice President, Chief Financial Officer and Treasurer.Mr. Strickler has served as Executive Vice President and Chief Financial Officer since joining the Company in January 2006. Mr. Strickler was appointed Treasurer of the Company in February 2007. Prior to his employment with the Company, Mr. Strickler served as Executive Vice President and Chief Financial Officer for Republic Engineered Products, Inc. (“Republic”), from February 2004 to January 2006. Before joining Republic, Mr. Strickler was BorgWarner, Inc.’s Executivehas served as a director, Vice PresidentChairman of the Board and Chief Financial Officer from February 2001 to November 2003.Chairman of the Audit Committee of TCP International Holdings Ltd., a manufacturer and distributor of energy efficient lighting technologies, since 2014.
Richard P. Adante, Vice President of Operations.Mr. Adante has served as Vice President of Operations since May 2011. From November 2009 until his appointment at Stoneridge, Mr. Adante was consulting through his personal consulting firm, RMA Management Consultants. From July 2006 to November 2009, Mr. Adante served as the President of Hawthorn Manufacturing, now known as Crowne Group.
Thomas A. Beaver, Vice President of the Company and President of Global Sales.Mr. Beaver has served as Vice President of the Company and President of Global Sales since May 2012. Prior to that,Mr. Beaverserved as Vice President of the Company and Vice President of Global Sales and Systems Engineering from January 2005 to May 2012. From January 2000 to January 2005, Mr. Beaver served as Vice President of Stoneridge Sales and Marketing.
Sergio de Cerqueira Leite, Director President of PST Eletrônica Ltda.Mr. Leite is a founding partner of PST. He has held the Director President position since 1997. Prior to that, he worked in PST’s sales and marketing department.
Charles A. Di Staulo, Vice President of Human Resources.Mr. Di Staulo has served as Vice President of Human Resources since joining the Company in March 2013. From November 2008 until his employment with the Company, Mr. Di Staulo served as Vice President of Human Resources for the North America Division of Tarkett. Prior to joining Tarkett, Mr. Di Staulo served as Director of Human Resources for the Decorative Products Division of OMNOVA Solutions from October 2006.
Peter Kruk, President of the Electronics Division.Mr. Kruk has served as President of the Electronics Division since August 2012. Mr. Kruk joined the Company in October 2009 as the Managing Director of Stoneridge Electronics – Europe. Prior to that, he served as President of HEXPOL Wheels and Managing Director of Stellana AB from 2007 to 2009. From 1992-2007 Mr. Kruk served in various capacities with ABB.
Michael D. Sloan, Vice President of the Company and President of the Control Devices Division. Mr. Sloan has served as President of the Control Devices Division since July 2009 and Vice President of the Company since December 2009. Prior to that, Mr. Sloan served as Vice President and General Manager of Stoneridge Hi-Stat from February 2004 to July 2009.
Available Information
We make available, free of charge through our website (www.stoneridge.com), our Annual Report on Form 10-K (“Annual Report”), Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the U.S. Securities and Exchange Commission (“SEC”), as soon as reasonably practicable after they are filed with the SEC. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, Code of Ethics for Senior Financial Officers, Whistleblower Policy and Procedures and the charters of the Board of Director’s Audit, Compensation and Nominating and Corporate Governance Committees are posted on our website as well. Copies of these documents will be available to any shareholder upon request. Requests should be directed in writing to Investor Relations at Stoneridge, Inc., 9400 East Market Street, Warren, Ohio 44484.
The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company. The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including the Company.
Our business is cyclical and seasonal in nature and downturns in the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets could reduce the sales and profitability of our business.
The demand for products in our Control Devices Electronics and WiringElectronics segments are largely dependent on the domestic and foreign production of automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicles. The markets for our products have been cyclical, because new vehicle demand is dependent on, among other things, consumer spending and is tied closely to the overall strength of the economy. Because the majority of our products are used principally in the production of vehicles for the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets, our net sales, and therefore our results of operations, are significantly dependent on the general state of the economy and other factors which affect these markets. A decline in commercial, automotive, agricultural, motorcycle and off-highway vehicle production, or a material decline in market share by one of our significant customers, could adversely impact our results of operations and financial condition. Also, the demand for our PST segment products are significantly dependent on the general state of the Brazilian economy.economy and automotive market.
In 2013,2014, approximately 57%79% of our net sales were derived from automotive, commercial, agricultural, motorcycle, off-highway and off-highwayagricultural vehicle markets while approximately 24%21% were derived from aftermarket distributors, mass merchandisers and monitoring services markets.
We have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity.
The financial position and results of operations of our international subsidiaries are initially recorded in various foreign currencies and then translated into U.S. dollars at the automotive marketapplicable exchange rate for inclusion in our consolidated financial statements. The strengthening of the U.S. dollar against these foreign currencies ordinarily has a negative effect on our reported sales and approximately 19%operating margin (and conversely, the weakening of the U.S. dollar against these foreign currencies has a positive impact). The volatility of currency exchange rates may materially adversely affect our operating results.
We are subject to risks related to our international operations.
Approximately 50.0% of our net sales in 2014 were derived from mass merchandisers. Seasonality experienced bysales outside of North America. At December 31, 2014, significant concentrations of net assets outside of North America included $87.0 million in South America and $69.4 million in Europe and Other. Non-current assets outside of North America accounted for approximately 65.1% of our served markets also impacts our operations.non-current assets as of December 31, 2014. International sales and operations are subject to significant risks, including, among others:
• | labor unrest; | |
• | difficulty in obtaining distribution support and potentially adverse tax consequences; and |
the imposition of product tariffs and the burden of complying with a wide variety of international and U.S. export laws.
We may not realize sales represented by awarded business.
We base our growth projections, in part, on business awards made by our customers. These business awards generally renew annually during a program life cycle. Failure of actual production orders from our customers to approximate these business awards could have a material adverse effect on our business, financial condition or results of operations.
The prices that we can charge some of our customers are predetermined and we bear the risk of costs in excess of our estimates, in addition to the risk of adverse effects resulting from general customer demands for cost reductions and quality improvements.
Our supply agreements with some of our customers require us to provide our products at predetermined prices. In some cases, these prices decline over the course of the contract and may require us to meet certain productivity and cost reduction targets. In addition, our customers may require us to share productivity savings in excess of our cost reduction targets. The costs that we incur in fulfilling these contracts may vary substantially from our initial estimates. Unanticipated cost increases or the inability to meet certain cost reduction targets may occur as a result of several factors, including increases in the costs of labor, components or materials. In some cases, we are permitted to pass on to our customers the cost increases associated with specific materials. Cost overruns that we cannot pass on to our customers could adversely affect our business, financial condition or results of operations.
OEM customers have exerted considerable pressure on component suppliers to reduce costs, improve quality and provide additional design and engineering capabilities and continue to demand and receive price reductions and measurable increases in quality through their use of competitive selection processes, rating programs and various other arrangements. We may be unable to generate sufficient production cost savings in the future to offset required price reductions. Additionally, OEMs have generally required component suppliers to provide more design engineering input at earlier stages of the product development process, the costs of which have, in some cases, been absorbed by the suppliers. Future price reductions, increased quality standards and additional engineering capabilities required by OEMs may reduce our profitability and have a material adverse effect on our business, financial condition or results of operations.
Our business is very competitive and increased competition could reduce our sales and profitability.
The markets for our products are highly competitive. We compete based on quality, service, price, performance, timely delivery and technological innovation. Many of our competitors are more diversified and have greater financial and other resources than we do. In addition, with respect to certain products, some of our competitors are divisions of our OEM customers. We cannot assure that our business will not be adversely affected by competition or that we will be able to maintain our profitability if the competitive environment changes.
The loss or insolvency of any of our major customers would adversely affect our future results.
We are dependent on several principal customers for a significant percentage of our net sales. In 2013,2014, our top three customers were Deere & Company, Navistar International Corporation and Ford Motor Company, Scania Group and Daimler which comprised 14%11%, 13%8% and 7%6% of our net sales, respectively. In 2013,2014, our top ten customers accounted for 58%48% of our net sales. The loss of any significant portion of our sales to these customers or any other customers would have a material adverse effect on our results of operations and financial condition. The contracts we have entered into with many of our customers provide for supplying the customers’ requirements for a particular model, rather than for manufacturing a specific quantity of products. Such contracts range from one year to the life of the model, which is generally three to seven years. These contracts are subject to renegotiation, which may affect product pricing and generally may be terminated by our customers at any time. Therefore, the loss of a contract for a major model or a significant decrease in demand for certain key models or any group of related models sold by any of our major customers could have a material adverse effect on our results of operations and financial condition by reducing cash flows and our ability to spread costs over a larger revenue base. We also compete to supply products for successor models and are subject to the risk that the customer will not select us to produce products on any such model, which could have a material adverse impact on our business, financial condition or results of operations. In addition, we have significant receivable balances related to these customers and other major customers that would be at risk in the event of their bankruptcy.
8 |
Consolidation among vehicle parts customers and suppliers could make it more difficult for us to compete successfully.
The vehicle part supply industry has undergone a significant consolidation as OEM customers have sought to lower costs, improve quality and increasingly purchase complete systems and modules rather than separate components. As a result of the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices. Because of these competitive pressures, we cannot assure you that we will be able to increase or maintain gross margins on product sales to our customers. The trend toward consolidation among vehicle parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete successfully in the future with these larger, consolidated companies, our business, financial condition or results of operations could be adversely affected.
We rely on independent dealers and distributors to sell certain products in the aftermarket sales channel and a disruption to this channel would harm our business.
Because we sell certain products such as security accessories and driver information products to independent dealers and distributors, we are subject to many risks, including risks related to their inventory levels and support for our products. If dealers and distributors do not maintain sufficient inventory levels to meet customer demand, our sales could be negatively impacted.
Our dealer network also sells products offered by our competitors. If our competitors offer our dealers more favorable terms, those dealers may de-emphasize or decline to carry our products. In the future, we may not be able to retain or attract a sufficient number of qualified dealers and distributors. If we are unable to maintain successful relationships with dealers and distributors, or to expand our distribution channels, our business will suffer.
We are dependent on the availability and price of raw materials and other supplies.
We require substantial amounts of raw materials and other supplies, and substantially all such materials we require are purchased from outside sources. The availability and prices of raw materials and other supplies may be subject to curtailment or change due to, among other things, new laws or regulations, suppliers’ allocations to other purchasers and interruptions in production by suppliers, weather emergencies, natural disasters, commercial disputes, acts of terrorism or war, changes in exchange rates and worldwide price levels. As demand for raw materials and other supplies increases as a result of a recovering economy, we may have difficulties obtaining adequate raw materials and other supplies from our suppliers to satisfy our customers. At times, we have experienced difficulty obtaining adequate supplies of semiconductors and memory chips for our Control Devices, Electronics and PST segments. In addition, there have been challenges at times in obtaining timely supply of nylon and resins for our Control Devices segment and audio component parts for our PST segment. If we cannot obtain adequate raw materials and other supplies, or if we experience an increase in the price of raw materials and other supplies, our business, financial condition or results of operations could be materially adversely affected.
We use a variety of commodities, including copper, zinc, resins and certain other commodities. Increasing commodity costs could have a negative impact on our results. We have sought to alleviate the effect of increasing costs by including a material pass-through provision in our customer contracts whenever possible, and at times by selectively hedging a portion of our copper exposure. The inability to pass-through increasing commodity costs or effectively hedge them may have a material adverse effect on our business, financial condition or results of operations.
We must implement and sustain a competitive technological advantage in producing our products to compete effectively.
Our products are subject to changing technology, which could place us at a competitive disadvantage relative to alternative products introduced by competitors. Our success will depend on our ability to continue to meet customers’ changing specifications with respect to quality, service, price, timely delivery and technological innovation by implementing and sustaining competitive technological advances. Our business may, therefore, require significant recurring additional capital expenditures and investment in product development and manufacturing and management information systems. We cannot assure that we will be able to achieve the technological advances or introduce new products that may be necessary to remain competitive. Our inability to continuously improve existing products, to develop new products and to achieve technological advances could have a material adverse effect on our business, financial condition or results of operations.
PST’s Global Positioning Systems (“GPS”) products depend upon satellites maintained by the United States Department of Defense. If a significant number of these satellites become inoperable, unavailable or are not replaced, or if the policies of the United States government for the use of the GPS without charge are changed, our business will suffer.
The GPS is a satellite-based navigation and positioning system consisting of a constellation of orbiting satellites. The satellites and their ground control and monitoring stations are maintained and operated by the United States Department of Defense. The Department of Defense does not currently charge users for access to the satellite signals. These satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of seven and a half years and are subject to damage by the hostile space environment in which they operate. However, of the current deployment of satellites in place, the average age is six years.
If a significant number of satellites were to become inoperable, unavailable or are not replaced, it would impair the current utility of our GPS products and the growth of market opportunities. In addition, there can be no assurance that the U.S. government will remain committed to the operation and maintenance of GPS satellites over a long period, or that the policies of the U.S. government that provide for the use of the GPS without charge and without accuracy degradation will remain unchanged. Because of the increasing commercial applications of the GPS, other U.S. government agencies may become involved in the administration or the regulation of the use of GPS signals. Any of the foregoing factors could affect the willingness of buyers of our products to select GPS-based products instead of products based on competing technologies, which could adversely affect our operational revenues and our financial condition.
We may incur material product liability costs.
We may be subject to product liability claims in the event that the failure of any of our products results in personal injury or death and we cannot assure that we will not experience material product liability losses in the future. We cannot assure that our product liability insurance will be adequate for liabilities ultimately incurred or that it will continue to be available on terms acceptable to us. In addition, if any of our products prove to be defective, we may be required to participate in government-imposed or customer OEM-instituted recalls involving such products. A successful claim brought against us that exceeds available insurance coverage or a requirement to participate in any product recall could have a material adverse effect on our business, financial condition or results of operations.
Increased or unexpected product warranty claims could adversely affect us.
We typically provide our customers a warranty covering workmanship, and in some cases materials, on products we manufacture. Our warranty generally provides that products will be free from defects and adhere to customer specifications. If a product fails to comply with the warranty, we may be obligated or compelled, at our expense, to correct any defect by repairing or replacing the defective product. We maintain warranty reserves in an amount based on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims. To estimate the warranty reserves, we must forecast the resolution of existing claims, as well as expected future claims on products previously sold. The amounts estimated to be due and payable could differ materially from what we may ultimately be required to pay. An increase in the rate of warranty claims or the occurrence of unexpected warranty claims could have a material adverse effect on our customer relations and our financial condition or results of operations.
If we fail to protect our intellectual property rights or maintain our rights to use licensed intellectual property or are found liable for infringing the rights of others, our business could be adversely affected.
Our intellectual property, including our patents, trademarks, copyrights, trade secrets and license agreements, are important in the operation of our businesses, and we rely on the patent, trademark, copyright and trade secret laws of the United States and other countries, as well as nondisclosure agreements, to protect our intellectual property rights. We may not, however, be able to prevent third parties from infringing, misappropriating or otherwise violating our intellectual property, breaching any nondisclosure agreements with us, or independently developing technology that is similar or superior to ours and not covered by our intellectual property. Any of the foregoing could reduce any competitive advantage we have developed, cause us to lose sales or otherwise harm our business. We cannot assure that any intellectual property will provide us with any competitive advantage or will not be challenged, rejected, cancelled, invalidated or declared unenforceable. In the case of pending patent applications, we may not be successful in securing issued patents, or securing patents that provide us with a competitive advantage for our businesses. In addition, our competitors may design products around our patents that avoid infringement and violation of our intellectual property rights.
We cannot be certain that we have rights to use all intellectual property used in the conduct of our businesses or that we have complied with the terms of agreements by which we acquire such rights, which could expose us to infringement, misappropriation or other claims alleging violations of third party intellectual property rights. Third parties have asserted and may assert or prosecute infringement claims against us in connection with the services and products that we offer, and we may or may not be able to successfully defend these claims. Litigation, either to enforce our intellectual property rights or to defend against claims regarding intellectual property rights of others, could result in substantial costs and in a diversion of our resources. Any such claims and resulting litigation could require us to enter into licensing agreements (if available on acceptable terms or at all), pay damages and cease making or selling certain products and could result in a loss of our intellectual property protection. Moreover, we may need to redesign some of our products to avoid future infringement liability. We also may be required to indemnify customers or other third parties at significant expense in connection with such claims and actions. Any of the foregoing could have a material adverse effect on our business, financial condition or results of operations.
Disruptions in the financial markets could adversely impact the availability and cost of credit which could negatively affect our business.
Our asset-basedrevolving credit facility (the “Credit Facility”) hascontains a maximumbase borrowing level of $100.0$300.0 million andwhich can be increased by $80.0 million upon the satisfaction of certain conditions. The Credit Facility is scheduled to expire on December 1, 2016. The available borrowing capacity on this Credit Facility is based on eligible current assets, as defined. As of December 31, 2013, we had undrawn borrowing capacity of $71.1 million, based on eligible current assets. We will need to refinance the Credit Facility prior to its expiration.September 12, 2019. Disruptions in the financial markets, including the bankruptcy, insolvency or restructuring of certain financial institutions, and the general lack of liquidity may adversely impact the availability and cost of credit. We may be required to refinance the Credit Facility at terms and rates that are less favorable than our current terms and rates, which could adversely affect our business, financial condition or results of operations.
Our debt obligations could limit our flexibility in managing our business and expose us to risks.
As of December 31, 2013, the2014, there was $100.0 million in borrowings outstanding principal amount ofon our senior secured notes was $175.0 million.Credit Facility. In addition, we are permitted under our Credit Facility and the indenture governing our senior secured notes to incur additional debt, subject to specified limitations. Our high degree of leverage and the terms of our indebtedness may have important consequences including the following:
we may have difficulty satisfying our obligations with respect to our indebtedness, and if we fail to comply with these requirements, an event of default could result;
we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other
general corporate activities;
covenants relating to our debt may limit our ability to obtain additional financing for working capital, capital
expenditures and other general corporate activities;
covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and
the industry in which we operate;
we may be more vulnerable than our competitors to the impact of economic downturns and adverse developments in our business; and
These and other consequences of our substantial leverage and the terms of our indebtedness could have a material adverse effect on our business, financial condition or results of operations.
Covenants in our Credit Facility and our indenture governing the senior secured notes may limit our ability to pursue our business strategies.
Our Credit Facility and the indenture governing our senior secured notes limitlimits our ability to, among other things:
substantially change the nature of our business.
The agreement governing our Credit Facility also requires us to maintain a maximum leverage ratio of (i) consolidated EBITDA, as defined in the Credit Facility, less specified items to (ii) consolidated fixed charges, as defined in the Credit Facility, of at least 1.103.00 to 1.00, whenever undrawn availability under the Credit Facility is less than $20.0 million.and a minimum interest coverage ratio of 3.50 to 1.00 and places a maximum annual limit on capital expenditures. Our ability to comply with this fixed charge coverage ratio requirement,these covenants as well as the restrictive covenants under the terms of our indebtedness, may be affected by events beyond our control.
The restrictions contained in the indenture governing our senior secured notes and the agreement governing our Credit Facility could:
A breach of any of the restrictive covenants under our indebtedness or our inability to comply with the fixed charge coverageleverage and interest ratio requirementrequirements in the Credit Facility could result in a default under the agreement governing the Credit Facility and the indenture governing the senior secured notes.Facility. If a default occurs, holders of the senior secured notes could declare all principal and interest to be due and payable, the lenders under the Credit Facility could elect to declare all outstanding borrowings, together with accrued interest and other fees, to be immediately due and payable and terminate any commitments they have to provide further borrowings, and holders of the senior secured notes and the Credit Facility lenders could pursue foreclosure and other remedies against us and our assets. The covenants included in our Credit Facility to date have not and are not expected to have an impact on our financing flexibility.
We may not be able to generate sufficient cash flows to meet our debt service obligations.
Our ability to make scheduled payments on, or to refinance, our obligations with respect to our indebtedness will depend on our financial and operating performance, which in turn will be affected by general economic conditions and by financial, competitive, regulatory and other factors beyond our control. We cannot assure that our business will generate sufficient cash flow from operations or that future sources of capital will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flow to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. The Credit Facility and the indenture governing our senior secured notes restrict our ability to dispose of assets and use the proceeds from the disposition. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, could materially and adversely affect our business, financial condition and results of operations.
If we cannot make scheduled payments on our debt, we will be in default and, as a result, holders of the senior secured notes could declare all outstanding principal and interest to be due and payable, the lenders under our Credit Facility could terminate their commitments to lend us money holders of the senior secured notes and the lenders under the Credit Facility could foreclose on or exercise other remedies against the assets securing the senior secured notes and borrowings under our Credit Facility and we could be forced into bankruptcy, liquidation or other insolvency proceedings, which, in each case, could result in a loss in the investmentvalue of our Common Shares.
Our physical properties and information systems are subject to damage as a result of disasters, outages or similar events.
Our offices and facilities, including those used for design and development, material procurement, manufacturing, logistics and sales are located throughout the world and are subject to possible destruction, temporary stoppage or disruption as a result of any number of unexpected events. If any of these facilities or offices was to experience a significant loss as a result of any of the above events, it could disrupt our operations, delay production, shipments and revenue, and result in large costs to repair or replace these facilities or offices.
In addition, network and information system shutdowns caused by unforeseen events such as power outages, disasters, hardware or software defects, computer viruses and computer security violations pose increasing risks. Such an event could also result in the disruption of our operations, delay production, shipments and revenue, and result in large expenditures necessary to repair or replace such network and information systems.
We may experience increased costs and other disruptions to our business associated with labor relations.
As of December 31, 2013,2014, we had approximately 9,3004,200 employees, approximately 3,40066% of whom were salaried, andlocated outside the balance of whom were paid on an hourly basis.United States. Although we have no collective bargaining agreements covering U.S. employees, certaina significant number of employees located in Brazil, Estonia, France, Mexico, Spain, Sweden and the United Kingdom either (i) are represented by a union and are covered by a collective bargaining agreement or (ii) are covered by works council or other employment arrangements required by law. We cannot assure you that other employees will not be represented by a labor organization in the future or that any of our facilities will not experience a work stoppage or other labor disruption. Any work stoppage or other labor disruption involving our employees, employees of our customers (many of which customers have employees who are represented by unions), or employees of our suppliers could have a material adverse effect on our business, financial condition or results of operations by disrupting our ability to manufacture our products or reducing the demand for our products.
Compliance with environmental and other governmental regulations could be costly and require us to make significant expenditures.
Our operations are subject to various federal, state, local and foreign laws and regulations governing, among other things:
• | the cleanup of contaminated properties; and | |
• | the health and safety of our employees. |
Our business, operations and facilities are subject to environmental and health and safety laws and regulations, many of which provide for substantial fines for violations. The operation of our manufacturing facilities entails risks and we cannot assure you that we will not incur material costs or liabilities in connection with these operations. In addition, potentially significant expenditures could be required in order to comply with evolving environmental, health and safety laws, regulations or requirements that may be adopted or imposed in the future. Changes in environmental, health and safety laws, regulations and requirements or other governmental regulations could increase our cost of doing business or adversely affect the demand for our products.
We also may be required to investigate or clean up contamination resulting from past or current uses of our properties. At our former Sarasota, Florida, facility, for example, groundwater and soil contamination caused by operations before we acquired the facility will require future cleanup. The costs of such remediation could have a material adverse effect on our business, financial condition or results of operations. Although no other environmental matters have been identified, other matters involving environmental contamination may also have a material adverse effect on our business, financial condition or results of operations.
We are subject to risks related to our international operations.
Approximately 37.2% of our net sales in 2013 were derived from sales outside of North America. At December 31, 2013, significant concentrations of net assets outside of North America included $160.6 million assigned to South America and $66.3 million assigned to Europe and Other. Non-current assets outside of North America accounted for approximately 68.1% of our non-current assets as of December 31, 2013. International sales and operations are subject to significant risks, including, among others:
We have foreign currency translation and transaction risks that may materially adversely affect our operating results, financial condition and liquidity.
The financial position and results of operations of many of our international subsidiaries are initially recorded in various foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. The strengthening of the U.S. dollar against these foreign currencies ordinarily has a negative effect on our reported sales and operating margin (and conversely, the weakening of the U.S. dollar against these foreign currencies has a positive impact). The volatility of currency exchange rates may materially adversely affect our operating results.
Our annual effective tax rate could be volatile and materially change as a result of changes in the mix of earnings and other factors.
Our overall effective tax rate is equal to our total tax expense as a percentage of our total earnings before tax. However, tax expense and benefits are not recognized on a global basis, but rather on a jurisdictional or legal entity basis. Losses in certain jurisdictions may not provide a current financial statement tax benefit. As a result, changes in the mix of earnings between jurisdictions, among other factors, could have a significant effect on our overall effective tax rate.
We may not be able to successfully integrate acquisitions into our business or may otherwise be unable to benefit from pursuing acquisitions.
Failure to successfully identify, complete and/or integrate acquisitions could have a material adverse effect on us. A portion of our growth in sales and earnings has been generated from acquisitions and subsequent improvements in the performance of the businesses acquired. We expect to continue a strategy of selectively identifying and acquiring businesses with complementary products. We cannot assure you that any business acquired by us will be successfully integrated with our operations or prove to be profitable. We could incur substantial indebtedness in connection with our acquisition strategy, which could significantly increase our interest expense. Covenant restrictions relating to such indebtedness could restrict our ability to pay dividends, fund capital expenditures and consummate additional acquisitions.
We anticipate that acquisitions could occur in geographic markets, including foreign markets, in which we do not currently operate. As a result, the process of integrating acquired operations into our existing operations may result in unforeseen operating difficulties and may require significant financial resources that would otherwise be available for the ongoing development or expansion of existing operations. Any failure to successfully integrate such acquisitions could have a material adverse effect on our business, financial condition or results of operations.
Item 1B. Unresolved Staff Comments.
None.
The Company and its joint venture currently own or lease 20ten manufacturing facilities that are in use, which together contain approximately 1.81.0 million square feet of manufacturing space. Of these manufacturing facilities, four are used by our Control Devices reportable segment, three are used by our Electronics reportable segment, seven are used by our Wiring reportable segment, seven are used by our Control Devices reportable segment, two are used by our PST reportable segment and one is used by our equity investment, Minda. The following table provides information regarding our facilities:
Owned/ | Square | ||||||
Location | Leased | Use | Footage | ||||
Control Devices | |||||||
Lexington, Ohio | Owned | Manufacturing/Division Office | 219,612 | ||||
Juarez, Mexico(A) | Owned | Manufacturing | |||||
Canton, Massachusetts | Owned | Manufacturing | 132,560 | ||||
Suzhou, China(A) | Leased | Manufacturing/Warehouse | |||||
El Paso, Texas(A) | Leased | Warehouse | 25,000 | ||||
Lexington, Ohio | Leased | Warehouse | 15,000 | ||||
Shanghai, China | Leased | ||||||
Lexington, Ohio | Leased | 2,700 | |||||
Beijing, China | Leased | Sales Office | 129 | ||||
Electronics | |||||||
Tallinn, Estonia(B) | Leased | Manufacturing | 85,911 | ||||
Orebro, Sweden | Leased | Manufacturing | 77,472 | ||||
Stockholm, Sweden | Leased | Engineering Office/Division Office | |||||
Dundee, Scotland | Leased | Manufacturing/Sales Office/Engineering Office | 32,753 | ||||
Bayonne, France | Leased | Sales Office/Warehouse | 9,655 | ||||
Sales Office/Warehouse | |||||||
Madrid, Spain | Leased | Sales Office/Warehouse | |||||
Rome, Italy | Leased | Sales Office | 1,216 | ||||
PST | |||||||
Manaus, Brazil | Owned | Manufacturing | 102,247 | ||||
São Paulo, Brazil | Owned | Manufacturing/Engineering Office/Division Office | 45,467 | ||||
Buenos Aires, Argentina | Leased | Sales Office | |||||
5,798 | |||||||
Corporate | |||||||
Novi, Michigan | Leased | Sales Office/Engineering Office | 9,400 | ||||
Warren, Ohio | Owned | Headquarters | 7,500 | ||||
Warren, Ohio | Leased | Data Center | 3,020 | ||||
Stuttgart, Germany | Leased | Sales Office/Engineering Office | 1,000 | ||||
Seoul, South Korea | Leased | Sales Office | 330 | ||||
Joint Venture | |||||||
Pune, India | Owned | Manufacturing/Engineering Office/Sales Office | 80,000 |
(A) This facility is also used in the Electronics and Wiring reportable segments.segment.
(B) This facility is also used in the Control Devices reportable segment.
We are involved in certain legal actions and claims arising in the ordinary course of business. However,Although it is not possible to predict with certainty the outcome of these matters, we do not believe that any of the litigation in which we are currently engaged, either individually or in the aggregate, will have a material adverse effect on our business, consolidated financial position or results of operations. We are subject to a tax assessment in Brazil related to value added taxes on vehicle tracking and monitoring services for which the likelihood of loss is not probable although it may take years to resolve. See additional details in Note 10We are also subject to the consolidated financial statements.litigation regarding patent infringement. We are also subject to the risk of exposure to product liability claims in the event that the failure of any of our products causes personal injury or death to users of our products and there can be no assurance that we will not experience any material product liability losses in the future. We maintain insurance against such product liability claims. In addition, if any of our products prove to be defective, we may be required to participate in a government-imposed or customer OEM-instituted recall involving such products. See additional details of these matters in Note 10 to the consolidated financial statements.
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Item 4. Mine Safety Disclosure.
Not Applicable.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our shares are listed on the New York Stock Exchange (“NYSE”) under the symbol “SRI.” As of February 28, 2014,2015, we had 28,329,69727,970,905 Common Shares, without par value, outstanding which were owned by approximately 300 registered holders, including Common Shares held in the names of brokers and banks (so-called “street name” holdings) who are record holders with approximately 2,5002,200 beneficial owners.
The Company has not historically paid or declared dividends, which are restricted under both our senior secured notes and our asset-based credit facility (the “Credit Facility”),the Credit Facility on our Common Shares. WeShares such that we may only pay cash dividends in the future of up to $7.0 million annually if immediately prior to and immediately after the payment is made, no event of default shall have occurred and outstanding indebtedness under our Credit Facility is not greater than or equal to $20.0 million before and after the payment of the dividend.shall have occurred. We currently intend to retain our earnings for acquisitions, working capital, capital expenditures, general corporate purposes and reduction in outstanding indebtedness. Accordingly, we do not expect to pay cash dividends in the foreseeable future.
High and low sales prices for our Common Shares for each quarter ended during 20132014 and 20122013 are as follows:
Quarter Ended | High | Low | ||||||||||||||||||
2014 | March 31 | $ | 12.83 | $ | 9.49 | |||||||||||||||
June 30 | $ | 11.62 | $ | 8.68 | ||||||||||||||||
September 30 | $ | 13.07 | $ | 10.40 | ||||||||||||||||
Quarter Ended | High | Low | December 31 | $ | 13.40 | $ | 10.46 | |||||||||||||
2013 | March 31 | $ | 8.05 | $ | 5.25 | March 31 | $ | 8.05 | $ | 5.25 | ||||||||||
June 30 | $ | 12.27 | $ | 6.59 | June 30 | $ | 12.27 | $ | 6.59 | |||||||||||
September 30 | $ | 13.63 | $ | 10.75 | September 30 | $ | 13.63 | $ | 10.75 | |||||||||||
December 31 | $ | 13.51 | $ | 10.83 | December 31 | $ | 13.51 | $ | 10.83 | |||||||||||
2012 | March 31 | $ | 10.89 | $ | 8.26 | |||||||||||||||
June 30 | $ | 10.15 | $ | 6.21 | ||||||||||||||||
September 30 | $ | 7.03 | $ | 4.45 | ||||||||||||||||
December 31 | $ | 5.36 | $ | 4.51 |
There were no repurchases of Common Shares made by us during the years ended December 31, 20132014 or 2012,2013, other than the repurchase of Common Shares to satisfy employee tax withholdings.
Performance Graph
Set forth below is a line graph comparing the cumulative total return of a hypothetical investment in our Common Shares with the cumulative total return of hypothetical investments in the Morningstar Auto Parts Industry Group Index and the NYSE Composite Index based on the respective market price of each investment as of December 31, 2008, 2009, 2010, 2011, 2012, 2013 and 20132014 assuming in each case an initial investment of $100 on December 31, 2008,2009, and reinvestment of dividends.
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
Stoneridge, Inc. | $ | 100 | $ | 198 | $ | 346 | $ | 185 | $ | 112 | $ | 280 | ||||||||||||
Morningstar Auto Parts Index (A) | $ | 100 | $ | 165 | $ | 249 | $ | 213 | $ | 253 | $ | 392 | ||||||||||||
NYSE Composite Index | $ | 100 | $ | 129 | $ | 147 | $ | 141 | $ | 164 | $ | 208 |
2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||||||||||||||||||
Stoneridge, Inc. | $ | 100 | $ | 175 | $ | 94 | $ | 57 | $ | 142 | $ | 143 | ||||||||||||
Morningstar Auto Parts Index | $ | 100 | $ | 151 | $ | 129 | $ | 153 | $ | 237 | $ | 262 | ||||||||||||
NYSE Composite Index | $ | 100 | $ | 114 | $ | 110 | $ | 128 | $ | 161 | $ | 172 |
For information on “Related Stockholder Matters” required by Item 201(d) of Regulation S-K, refer to Item 12 of this report.
16 |
Item 6. Selected Financial Data.
The following table sets forth selected historical financial data and should be read in conjunction with the consolidated financial statements and notes related thereto and other financial information included elsewhere herein. The selected historical data was derived from our consolidated financial statements.
Years ended December 31 | 2013 (A) | 2012 (A) | 2011 (A) | 2010 (B) | 2009 | 2014(A) | 2013(A) | 2012(A) | 2011(A) | 2010(B) | ||||||||||||||||||||||||||||||
(in thousands, except per share data) | (in thousands, except per share data) | |||||||||||||||||||||||||||||||||||||||
Statement of Operations Data: | ||||||||||||||||||||||||||||||||||||||||
Net sales: | ||||||||||||||||||||||||||||||||||||||||
Control Devices | $ | 294,020 | $ | 271,765 | $ | 262,935 | $ | 240,894 | $ | 176,815 | $ | 309,738 | $ | 294,020 | $ | 271,765 | $ | 262,935 | $ | 240,894 | ||||||||||||||||||||
Electronics | 230,946 | 216,053 | 238,537 | 179,895 | 139,182 | 249,304 | 230,946 | 216,053 | 238,537 | 179,895 | ||||||||||||||||||||||||||||||
Wiring | 295,937 | 329,831 | 328,374 | 260,965 | 195,452 | |||||||||||||||||||||||||||||||||||
PST | 178,532 | 180,410 | - | - | - | 139,780 | 178,532 | 180,410 | - | - | ||||||||||||||||||||||||||||||
Eliminations | (51,605 | ) | (59,546 | ) | (64,473 | ) | (46,528 | ) | (36,297 | ) | (38,243 | ) | (44,012 | ) | (55,762 | ) | (61,648 | ) | (43,779 | ) | ||||||||||||||||||||
Total net sales | $ | 947,830 | $ | 938,513 | $ | 765,373 | $ | 635,226 | $ | 475,152 | $ | 660,579 | $ | 659,486 | $ | 612,466 | $ | 439,824 | $ | 377,010 | ||||||||||||||||||||
Gross profit | $ | 226,021 | $ | 224,644 | $ | 146,777 | $ | 145,556 | $ | 87,732 | $ | 190,874 | $ | 205,955 | $ | 185,267 | $ | 121,289 | $ | 105,576 | ||||||||||||||||||||
Operating income (loss) | $ | 39,704 | $ | 28,729 | $ | 13,526 | $ | 23,524 | $ | (18,496 | ) | |||||||||||||||||||||||||||||
Equity in earnings of investees | $ | 476 | $ | 760 | $ | 10,034 | $ | 10,346 | $ | 7,775 | ||||||||||||||||||||||||||||||
Income (loss) before income taxes: | ||||||||||||||||||||||||||||||||||||||||
Control Devices | $ | 26,914 | $ | 15,048 | $ | 17,145 | $ | 15,877 | $ | (6,463 | ) | $ | 35,387 | $ | 32,331 | $ | 20,945 | $ | 22,851 | $ | 21,716 | |||||||||||||||||||
Electronics | 15,596 | 10,049 | 14,743 | 37,807 | (15,732 | ) | 17,444 | 20,732 | 15,851 | 21,304 | 9,200 | |||||||||||||||||||||||||||||
Wiring | (10,074 | ) | (289 | ) | (17,119 | ) | 4,177 | 1,821 | ||||||||||||||||||||||||||||||||
PST - consolidated(A) | 5,395 | (4,985 | ) | - | - | - | ||||||||||||||||||||||||||||||||||
PST - equity in earnings of investee(A) | - | - | 8,805 | 9,490 | 7,385 | |||||||||||||||||||||||||||||||||||
Other corporate activities | (1,117 | ) | 635 | 63,461 | (35,164 | ) | 1,192 | |||||||||||||||||||||||||||||||||
Corporate interest | (15,980 | ) | (15,898 | ) | (15,393 | ) | (20,163 | ) | (21,782 | ) | ||||||||||||||||||||||||||||||
Total income (loss) before income taxes | $ | 20,734 | $ | 4,560 | $ | 71,642 | $ | 12,024 | $ | (33,579 | ) | |||||||||||||||||||||||||||||
PST - consolidated(A) (D) | (59,587 | ) | 7,211 | 583 | - | - | ||||||||||||||||||||||||||||||||||
Unallocated Corporate | (19,067 | ) | (17,871 | ) | (17,474 | ) | (20,620 | ) | (18,730 | ) | ||||||||||||||||||||||||||||||
Total operating income (loss) | $ | (25,823 | ) | $ | 42,403 | $ | 19,905 | $ | 23,535 | $ | 12,186 | |||||||||||||||||||||||||||||
Equity in earnings of investees(A) | $ | 815 | $ | 476 | $ | 760 | $ | 10,034 | $ | 10,346 | ||||||||||||||||||||||||||||||
Income (loss) before income taxes from continuing operations | $ | (53,060 | ) | $ | 23,326 | $ | (3,810 | ) | $ | 80,663 | $ | 1,392 | ||||||||||||||||||||||||||||
Income (loss) from continuing operations(E) | $ | (51,204 | ) | $ | 20,529 | $ | (3,777 | ) | $ | 55,349 | $ | 2,906 | ||||||||||||||||||||||||||||
Income (loss) from discontinued operations(C) | (9,387 | ) | (4,021 | ) | 7,525 | (9,812 | ) | 8,440 | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 16,508 | $ | 3,748 | $ | 45,537 | $ | 11,346 | $ | (32,576 | ) | (60,591 | ) | 16,508 | 3,748 | 45,537 | 11,346 | |||||||||||||||||||||||
Net income (loss) attributable to noncontrolling interest | 1,377 | (1,613 | ) | (3,820 | ) | (184 | ) | 82 | (13,483 | ) | 1,377 | (1,613 | ) | (3,820 | ) | (184 | ) | |||||||||||||||||||||||
Net income (loss) attributable to Stoneridge, Inc. | $ | 15,131 | $ | 5,361 | $ | 49,357 | $ | 11,530 | $ | (32,658 | ) | $ | (47,108 | ) | $ | 15,131 | $ | 5,361 | $ | 49,357 | $ | 11,530 | ||||||||||||||||||
Basic net income (loss) per share | $ | 0.57 | $ | 0.20 | $ | 2.04 | $ | 0.48 | $ | (1.38 | ) | |||||||||||||||||||||||||||||
Diluted net income (loss) per share | $ | 0.56 | $ | 0.20 | $ | 2.00 | $ | 0.47 | $ | (1.38 | ) | |||||||||||||||||||||||||||||
Basic earnings (loss) per share from continuing operations attributable to Stoneridge, Inc. | $ | (1.40 | ) | $ | 0.72 | $ | (0.08 | ) | $ | 2.45 | $ | 0.13 | ||||||||||||||||||||||||||||
Diluted earnings (loss) per share from continuing operations attributable to Stoneridge, Inc. | $ | (1.40 | ) | $ | 0.70 | $ | (0.08 | ) | $ | 2.40 | $ | 0.13 | ||||||||||||||||||||||||||||
Other Data: | ||||||||||||||||||||||||||||||||||||||||
Product development expenses | $ | 45,261 | $ | 44,798 | $ | 35,263 | $ | 37,563 | $ | 32,993 | ||||||||||||||||||||||||||||||
Basic earnings (loss) per share attributable to discontinued operations | $ | (0.35 | ) | $ | (0.15 | ) | $ | 0.28 | $ | (0.41 | ) | $ | 0.35 | |||||||||||||||||||||||||||
Diluted earnings (loss) per share attributable to discontinued operations | $ | (0.35 | ) | $ | (0.14 | ) | $ | 0.28 | $ | (0.40 | ) | $ | 0.34 | |||||||||||||||||||||||||||
Basic earnings (loss) per share attributable to Stoneridge, Inc. | $ | (1.75 | ) | $ | 0.57 | $ | 0.20 | $ | 2.04 | $ | 0.48 | |||||||||||||||||||||||||||||
Diluted earnings (loss) per share attributable to Stoneridge, Inc. | $ | (1.75 | ) | $ | 0.56 | $ | 0.20 | $ | 2.00 | $ | 0.47 | |||||||||||||||||||||||||||||
Other Continuing Operations Data: | ||||||||||||||||||||||||||||||||||||||||
Design and development | $ | 41,609 | $ | 40,372 | $ | 38,945 | $ | 29,115 | $ | 30,358 | ||||||||||||||||||||||||||||||
Capital expenditures | $ | 25,344 | $ | 26,352 | $ | 26,290 | $ | 18,574 | $ | 11,998 | $ | 23,516 | $ | 21,576 | $ | 22,909 | $ | 16,550 | $ | 12,078 | ||||||||||||||||||||
Depreciation and amortization(C) | $ | 34,264 | $ | 34,459 | $ | 19,085 | $ | 19,285 | $ | 19,939 | ||||||||||||||||||||||||||||||
Depreciation and amortization(F) | $ | 27,105 | $ | 29,286 | $ | 29,405 | $ | 14,643 | $ | 15,126 | ||||||||||||||||||||||||||||||
Balance Sheet Data (as of December 31): | ||||||||||||||||||||||||||||||||||||||||
Working capital | $ | 186,514 | $ | 157,585 | $ | 131,534 | $ | 137,193 | $ | 145,306 | $ | 125,197 | $ | 215,880 | $ | 157,585 | $ | 131,534 | $ | 137,193 | ||||||||||||||||||||
Total assets | $ | 588,322 | $ | 592,691 | $ | 695,495 | $ | 386,736 | $ | 367,008 | $ | 398,751 | $ | 588,322 | $ | 592,691 | $ | 695,495 | $ | 386,736 | ||||||||||||||||||||
Long-term debt, net of current portion | $ | 185,045 | $ | 181,311 | $ | 183,711 | $ | 167,903 | $ | 183,431 | $ | 110,651 | $ | 185,045 | $ | 181,311 | $ | 183,711 | $ | 167,903 | ||||||||||||||||||||
Shareholders' equity | $ | 188,534 | $ | 193,834 | $ | 180,639 | $ | 91,219 | $ | 76,467 | $ | 113,806 | $ | 188,534 | $ | 193,834 | $ | 180,639 | $ | 91,219 |
(A) | The acquisition of a controlling interest in PST occurred on December 31, 2011. |
(B) |
(C) | The Company sold its Wiring business during the year ended December 31, 2014. As such, for all periods presented the Company reported this business as discontinued operations in the Company’s consolidated financial statements. |
(D) | The Company recorded a goodwill impairment of $51,458 related to PST during the year ended December 31, 2014. |
(E) | The Company recorded a loss on extinguishment of debt of $10,607 related to the redemption of the 9.5% senior secured notes during the year ended December 31, 2014. |
(F) | These amounts represent depreciation and amortization on fixed and certain finite-lived intangible assets. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Background
We are a global designer and manufacturer of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets.
Segments
We are primarily organized by products produced and markets served. Under this structure, our operations have been reported utilizing the following segments:
Control Devices.This segment includes results of operations that manufacture sensors, switches, valves and actuators.
Electronics.This segment includes results of operations from the production of electronic instrument clusters, electronic control units and driver information systems.
Wiring.This segment includes results of operations that produce electrical power and signal distribution systems, primarily wiring harnesses and connectors and that assemble instrument panels.
PST.This segment includes results of operations that design and manufacture electronic vehicle alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.
During the second quarter of 2014 we entered into an asset purchase agreement to divest our Wiring business, which designed and manufactured wiring harness products and assembled instrument panels principally for the commercial, agricultural and off-highway vehicle markets. On August 1, 2014, we completed the sale of substantially all of the assets and liabilities of the Wiring business. As a result of the sale, this business is classified as discontinued operations in our consolidated financial statements and no discussion and analysis of financial condition and results of operations is provided herein.
Overview
The Company had a loss from continuing operations attributable to Stoneridge, Inc. had net income of $15.1$(37.7) million, or $0.56$(1.40) per diluted share and a loss from discontinued operations attributable to Stoneridge, Inc. of $(9.4) million, or $(0.35) per diluted share resulting in a net loss attributable to Stoneridge, Inc. of $(47.1) million, or $(1.75) per diluted share for the year ended December 31, 2014.
Loss from continuing operations attributable to Stoneridge. Inc. of $(37.7) million, or $(1.40) per diluted share for the year ended December 31, 2014 decreased by $56.9 million, or $2.10 per diluted share from income from continuing operations of $19.2 million, or $0.70 per diluted share for the year ended December 31, 2013 primarily due to a goodwill impairment charge of $40.2 million (net of $11.3 million attributable to noncontrolling interest) related to our PST segment and loss on extinguishment of debt of $10.6 million, which had an aggregate negative impact of $50.8 million, or $1.89 per share attributable to Stoneridge, Inc.
The Company recorded goodwill impairment related to our PST segment during 2014 based on a significant decrease in our future sales and earnings growth expectations resulting from lower forecasted growth in the Brazilian economy and automotive market and a decline in PST’s operating performance in 2014. Also, the Company redeemed all $175.0 million of the 9.5% senior notes at a premium of $8.0 million in the late third and early fourth quarter of 2014 resulting in a debt extinguishment net loss of $10.6 million. The senior notes were redeemed using borrowings under our amended revolving credit facility (the “Credit Facility”), proceeds from the Wiring business sale and existing cash.
Net sales increased by $1.1 million, or 0.2%, primarily due to higher sales in our Electronics and Control Devices segments totaling $39.8 million during 2014 compared to $5.42013 which were substantially offset by lower product sales volume and unfavorable foreign currency translation totaling $38.7 million at our PST segment.
Loss from discontinued operations related to the Wiring business was $(9.4) million, or $0.20$(0.35) per diluted share for the year ended December 31, 2012.
2014, a $5.4 million, or $0.21 per diluted share increase from loss from discontinued operations of $(4.0) million, or $(0.14) per diluted share for 2013. The increase in 2013 earnings compared to 2012 was primarily due to increased sales in our diversified served markets, a favorable change in mixthe after-tax loss on disposal of products sold, decreased selling, general and administrative (“SG&A”) expenses, lower interest expense and lower foreign currency losses, which were all partially offset by higher income taxes.
Net sales increased by $9.3 million primarily attributable to $25.2 million from increased production volumes and salesthe Wiring business of new products in the North American automotive vehicle market and $25.3 million from higher sales to our European commercial vehicle customers. These net sales increases were partially offset by $37.5 million decreased sales volume to North American commercial vehicle customers and the negative effect of unfavorable changes in foreign currency exchange rates related to PST revenues during the year ended December 31, 2013 when compared to the year ended December 31, 2012.
$(8.6) million.
At December 31, 2014 and 2013, and December 31, 2012, we maintainedhad cash and cash equivalents balances of $43.0 million and $62.8 million, and $44.6 million, respectively. As discussed in Note 4The decrease during 2014 was primarily due to the consolidated financial statements,fact that cash was used to partially fund the redemption of the 9.5% senior secured notes. At December 31, 2014 we had no$100.0 million in borrowings outstanding on our asset-based credit facility (the “Credit Facility”) at December 31, 2013 or 2012. We had undrawn borrowing capacity of $71.1 million and $74.1 million at December 31, 2013 and 2012, respectively.Credit Facility.
Outlook
The North American commercialautomotive vehicle market weakenedproduction is forecasted to be in the second halfrange of 2012, and17.0 million to 17.4 million units in 2015, which is an increase from the market continued to show weakness throughout 2013 which we expect will continue17.0 million units produced in 2014.
The improvement in the North American automotive vehicle market and sales of new products had a favorable effect on our Control Devices segment’s results in 2013. North American automotive vehicle production was 16.2 million units for 2013 compared to 15.4 million units in 2012. Forduring 2014 this production volume is forecasted to be in the range of 16.2 million to 16.8 million units.
The European commercial vehicle market is expected to continue to improve in 2014. However, if actual production is lower than forecasted, it will negatively affect our Electronics segment.
Agricultural vehicle production decreased for the first half of of 2013 when compared to the first half of 2012 which unfavorably affected our Wiring segment. However, production increased in the second half of 2013.
For 2013, revenues of our PST segment increased in local Brazilian currency compared to 2012 due to increased market share in its audio products which we expect will continue into 2015.
The North American commercial vehicle market improved in 2014, which is forecasted to benefit fromcontinue in 2014. However, any2015 and is expected to have a favorable impact on our Control Devices and Electronics segments.
While the European commercial vehicle market declined in 2014, it is forecasted to have modest improvement in 2015 which is expected to have a favorable impact on our Electronics segment.
Our PST segment revenues and operating performance declined in 2014 compared to 2013 due to a significant weakening of the Brazilian economy and automotive market. The International Monetary Fund (IMF) forecasts the Brazil gross domestic product to grow only 0.3% and 1.5% in 2015 and 2016, respectively. Based on the decline in PST’s sales and operating performance in 2014 and lower forecasted growth of the Brazilian economy, PST’s sales and earnings growth expectations have been significantly reduced. Since there is significant uncertainty regarding the timing and magnitude of the recovery in the Brazilian economy and automotive market, PST will have a negative effectcontinue to realign its cost structure to mitigate the impact on our results.earnings of possible continued weakened product demand and unfavorable foreign currency exchange rates in 2015.
Due to the competitive nature of the markets we serve, in the ordinary course of business we face pricing pressures from our customers. In response to these pricing pressures we have been able to effectively manage our production costs by the combination of lowering certain costs and limiting the increase of others, the net impact of which has not been material. However, if we are unable to effectively manage production costs in the future to mitigate future pricing pressures, our results of operations would be adversely affected.
Year Ended December 31, 20132014 Compared To Year Ended December 31, 20122013
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||||||||
increase / | ||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | |||||||||||||||||
Net sales | $ | 947,830 | 100.0 | % | $ | 938,513 | 100.0 | % | $ | 9,317 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 721,809 | 76.2 | 713,869 | 76.1 | 7,940 | |||||||||||||||
Selling, general and administrative | 186,317 | 19.6 | 195,915 | 20.8 | (9,598 | ) | ||||||||||||||
Operating income | 39,704 | 4.2 | 28,729 | 3.1 | 10,975 | |||||||||||||||
Interest expense, net | 18,346 | 1.9 | 20,033 | 2.1 | (1,687 | ) | ||||||||||||||
Equity in earnings of investees | (476 | ) | - | (760 | ) | (0.1 | ) | 284 | ||||||||||||
Other expense, net | 1,100 | 0.1 | 4,896 | 0.6 | (3,796 | ) | ||||||||||||||
Income before income taxes | 20,734 | 2.2 | 4,560 | 0.5 | 16,174 | |||||||||||||||
Provision for income taxes | 4,226 | 0.5 | 812 | 0.1 | 3,414 | |||||||||||||||
Net income | 16,508 | 1.7 | 3,748 | 0.4 | 12,760 | |||||||||||||||
Net income (loss) attributable to noncontrolling interest | 1,377 | 0.1 | (1,613 | ) | (0.2 | ) | 2,990 | |||||||||||||
Net income attributable to Stoneridge, Inc. | $ | 15,131 | 1.6 | % | $ | 5,361 | 0.6 | % | $ | 9,770 |
Dollar | ||||||||||||||||||||
increase / | ||||||||||||||||||||
Years ended December 31 | 2014 | 2013 | (decrease) | |||||||||||||||||
Net sales | $ | 660,579 | 100.0 | % | $ | 659,486 | 100.0 | % | $ | 1,093 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 469,705 | 71.1 | 453,531 | 68.8 | 16,174 | |||||||||||||||
Selling, general and administrative | 123,630 | 18.7 | 123,180 | 18.7 | 450 | |||||||||||||||
Design and development | 41,609 | 6.3 | 40,372 | 6.1 | 1,237 | |||||||||||||||
Goodwill impairment | 51,458 | 7.8 | - | - | 51,458 | |||||||||||||||
Operating income (loss) | (25,823 | ) | (3.9 | ) | 42,403 | 6.4 | (68,226 | ) | ||||||||||||
Interest expense, net | 16,880 | 2.6 | 18,096 | 2.7 | (1,216 | ) | ||||||||||||||
Equity in earnings of investee | (815 | ) | (0.1 | ) | (476 | ) | (0.1 | ) | (339 | ) | ||||||||||
Loss on early extinguishment of debt | 10,607 | 1.6 | - | - | 10,607 | |||||||||||||||
Other expense, net | 565 | 0.1 | 1,457 | 0.3 | (892 | ) | ||||||||||||||
Income (loss) before income taxes from continuing operations | (53,060 | ) | (8.1 | ) | 23,326 | 3.5 | (76,386 | ) | ||||||||||||
Provision (benefit) for income taxes from continuing operations | (1,856 | ) | (0.3 | ) | 2,797 | 0.4 | (4,653 | ) | ||||||||||||
Income (loss) from continuing operations | (51,204 | ) | (7.8 | ) | 20,529 | 3.1 | (71,733 | ) | ||||||||||||
Discontinued operations: | ||||||||||||||||||||
Income (loss) from discontinued operations, net of tax | (811 | ) | (0.1 | ) | (4,021 | ) | (0.6 | ) | 3,210 | |||||||||||
Loss on disposal, net of tax | (8,576 | ) | (1.3 | ) | - | - | (8,576 | ) | ||||||||||||
Loss from discontinued operations | (9,387 | ) | (1.4 | ) | (4,021 | ) | (0.6 | ) | (5,366 | ) | ||||||||||
Net income (loss) | (60,591 | ) | (9.2 | ) | 16,508 | 2.5 | (77,099 | ) | ||||||||||||
Net income (loss) attributable to noncontrolling interest | (13,483 | ) | (2.0 | ) | 1,377 | 0.2 | (14,860 | ) | ||||||||||||
Net income (loss) attributable to Stoneridge, Inc. | $ | (47,108 | ) | (7.2 | )% | $ | 15,131 | 2.3 | % | $ | (62,239 | ) |
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar | Percent | Dollar | Percent | |||||||||||||||||||||||||||||||||||||||||||||
increase / | increase / | increase / | increase / | |||||||||||||||||||||||||||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | 2014 | 2013 | (decrease) | (decrease) | ||||||||||||||||||||||||||||||||||||||||
Control Devices | $ | 291,145 | 30.8 | % | $ | 267,859 | 28.6 | % | $ | 23,286 | 8.7 | % | $ | 306,658 | 46.4 | % | $ | 291,145 | 44.1 | % | $ | 15,513 | 5.3 | % | ||||||||||||||||||||||||
Electronics | 189,809 | 20.0 | 164,196 | 17.5 | 25,613 | 15.6 | % | 214,141 | 32.4 | 189,809 | 28.8 | 24,332 | 12.8 | % | ||||||||||||||||||||||||||||||||||
Wiring | 288,344 | 30.4 | 326,048 | 34.7 | (37,704 | ) | (11.6 | )% | ||||||||||||||||||||||||||||||||||||||||
PST | 178,532 | 18.8 | 180,410 | 19.2 | (1,878 | ) | (1.0 | )% | 139,780 | 21.2 | 178,532 | 27.1 | (38,752 | ) | (21.7 | )% | ||||||||||||||||||||||||||||||||
Total net sales | $ | 947,830 | 100.0 | % | $ | 938,513 | 100.0 | % | $ | 9,317 | 1.0 | % | $ | 660,579 | 100.0 | % | $ | 659,486 | 100.0 | % | $ | 1,093 | 0.2 | % |
Our Control Devices segment net sales increased due to higher volume primarily in our North American automotive and commercial vehicle markets of $13.6 million and $2.7 million, respectively, during 2014 when compared to 2013.
Our Electronics segment net sales increased primarily due to higher sales of our European and North American commercial vehicle products each of which increased by $15.6 million. This was a result of higher volume including post-disposition sales to the Wiring business acquired by Motherson of $12.2 million and new product sales for 2014 when compared to 2013. These increases were partially offset by an unfavorable change in foreign currency translation which reduced sales by approximately $7.0 million, or 4.0%.
Our PST segment net sales decreased during 2014 compared to the same period in 2013 due to lower product volume in its OEM, audio and aftermarket channels resulting from weakness in the Brazilian economy and automotive market as well as an unfavorable change in foreign currency translation which reduced sales by approximately $12.7 million, or 7.1%.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2014 | 2013 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 330,516 | 50.0 | % | $ | 301,592 | 45.7 | % | $ | 28,924 | 9.6 | % | ||||||||||||
South America | 139,780 | 21.2 | 178,532 | 27.1 | (38,752 | ) | (21.7 | )% | ||||||||||||||||
Europe and Other | 190,283 | 28.8 | 179,362 | 27.2 | 10,921 | 6.1 | % | |||||||||||||||||
Total net sales | $ | 660,579 | 100.0 | % | $ | 659,486 | 100.0 | % | $ | 1,093 | 0.2 | % |
The increase in North American net sales was primarily attributable to increased sales volume in our North American commercial vehicle and automotive markets of $18.3 million and $13.6 million, respectively. Our decrease in net sales in South America was primarily due to lower PST product sales volume and the negative impact of unfavorable foreign currency translation. Our increase in net sales in Europe and Other was primarily due to increased sales of European commercial vehicle market products of $15.6 million, partially offset by an unfavorable change in foreign currency translation.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 3.6% primarily due to higher material costs. Our material cost as a percentage of net sales increased to 49.2% for 2014 compared to 46.7% for 2013. As a result, our gross margin declined to 28.9% for 2014 compared to 31.2% for 2013. Material costs increased and gross margin declined primarily due to an unfavorable change in foreign currency exchange rates and an unfavorable mix of products sold in our Electronics and PST segments.
Our Control Devices segment gross margin increased slightly due to the benefit of increased sales volume and labor efficiencies.
Our Electronics segment gross margin declined despite an increase in sales due to higher material costs resulting from an unfavorable change in certain foreign currency exchange rates and an unfavorable change in mix of products sold.
Our PST segment gross margin declined due to lower sales volume, higher material costs due to an unfavorable change in foreign currency exchange rates and an unfavorable change in mix of products sold as well as an increase in labor costs which included $0.9 million in business realignment costs.
Selling, General and Administrative (“SG&A”). SG&A expenses increased by $0.5 million for 2014 compared to 2013 due to higher wages and other employee benefits which included business realignment costs in our PST segment of $0.5 million, and higher performance-based compensation, product liability and intellectual property defense costs, which were partially offset by lower SG&A costs in our PST segment as a result of lower sales commissions, foreign currency translation and the implementation of cost savings measures.
Design and Development.Design and development costs increased by $1.2 million due to higher product development costs in our Controls Devices segment and lower cost reimbursements in our Electronics segment, which were partially offset by lower product development costs in our PST segment.
Goodwill Impairment. A goodwill impairment of $51.5 million was recorded for the year ended December 31, 2014 related to our PST segment. The impairment was due to lower future sales and earnings growth projections resulting from significant weakening of the Brazilian economy and automotive market. This non-cash impairment is more fully described in Note 2 to our consolidated financial statements.
Operating Income (Loss). Operating income (loss) is summarized in the following table by reportable segment (in thousands):
Dollar | Percent | |||||||||||||||
increase / | increase / | |||||||||||||||
Years ended December 31 | 2014 | 2013 | (decrease) | (decrease) | ||||||||||||
Control Devices | $ | 35,387 | $ | 32,331 | $ | 3,056 | 9.5 | % | ||||||||
Electronics | 17,444 | 20,732 | (3,288 | ) | (15.9 | )% | ||||||||||
PST | (59,587 | ) | 7,211 | (66,798 | ) | NM | ||||||||||
Unallocated corporate | (19,067 | ) | (17,871 | ) | (1,196 | ) | (6.7 | )% | ||||||||
Operating income (loss) | $ | (25,823 | ) | $ | 42,403 | $ | (68,226 | ) | (160.9 | )% |
NM – not meaningful
Our Control Devices segment operating income increased due to an increase in sales volume and labor efficiencies, which were partially offset by higher design and development, SG&A personnel and product liability defense costs.
Our Electronics segment operating income decreased despite higher sales due to higher material costs resulting from an unfavorable change in certain foreign exchange rates and an unfavorable change in mix of products sold. Also, operating income decreased as a result of higher design and development, SG&A personnel and intellectual property defense costs.
Our PST segment operating performance decreased due to a goodwill impairment charge of $51.5 million, lower sales volume, higher material costs due to an unfavorable change in foreign currency exchange rates and mix of products sold as well as increased labor costs including business realignment costs of $1.6 million, which were partially offset by lower other sales, general and administrative costs and design and development costs resulting from cost reduction measures implemented.
Unallocated corporate operating loss increased primarily due to higher performance-based compensation.
Operating income (loss) by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2014 | 2013 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 22,779 | (88.3 | )% | $ | 18,538 | 43.7 | % | $ | 4,241 | 22.9 | % | ||||||||||||
South America | (59,587 | ) | 230.8 | 7,211 | 17.0 | (66,798 | ) | NM | ||||||||||||||||
Europe and Other | 10,985 | (42.5 | ) | 16,654 | 39.3 | (5,669 | ) | (34.0 | )% | |||||||||||||||
Operating income (loss) | $ | (25,823 | ) | 100.0 | % | $ | 42,403 | 100.0 | % | $ | (68,226 | ) | (160.9 | )% |
North American operating income includes interest expense, net of approximately $13.1 million and $15.9 million for the years ended December 31, 2014 and 2013, respectively.
Our North American operating results increased primarily as a result of increased sales in the North American commercial vehicle and automotive markets. The decrease in profitability in South America was primarily due to a PST goodwill impairment charge, lower sales volume, an unfavorable change in mix of products sold, increased labor costs and an unfavorable impact of foreign exchange rates. Our results in Europe and Other were negatively affected by higher material costs from an unfavorable change in foreign currency exchange rates and an unfavorable mix of product sales and higher SG&A expenses substantially all of which related to our Electronics segment.
Interest Expense, net.Interest expense, net decreased by $1.2 million, or 6.7% during 2014 when compared to 2013 primarily due to a lower average debt balance outstanding and a lower weighted-average interest rate. We redeemed our $175.0 million 9.5% senior secured notes in September and October 2014 using borrowings of $100.0 million on our Credit Facility (which bore annual interest of approximately 1.7% in the fourth quarter of 2014), proceeds from the sale of the Wiring business and existing cash.
Equity in Earnings of Investee.Equity earnings for Minda increased to $0.8 million from $0.5 million in 2013 primarily due to higher sales, which were partially offset by unfavorable changes in foreign currency translation.
Other Expense, net. Other expense, net was $0.6 million for 2014 compared to $1.5 million for 2013. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the consolidated statement of operations. Our results for 2014 and 2013 were unfavorably affected by approximately $1.2 million and $2.1 million, respectively, due to the volatility in certain foreign exchange rates. The majority of the unfavorable foreign currency loss for 2014 relates to the currency fluctuation of the Argentinian peso compared to the Brazilian real in our PST segment. The unfavorable foreign currency losses were partially offset by the gain of $0.4 million in 2014 on the termination of our interest rate swap and income of $0.6 million received in 2013 by our PST segment associated with deposits at a financial institution.
Provision (Benefit) for Income Taxes. We recognized an income tax provision (benefit) of $(1.9) million and $2.8 million for federal, state and foreign income taxes for 2014 and 2013, respectively. We continue to assert that it is more-likely-than-not that our U.S. and certain foreign deferred tax assets will not be realized, and therefore we provide a valuation allowance offsetting those deferred tax assets. The decrease in tax expense for 2014 compared to 2013 was predominantly due to the tax benefit recognized on the loss incurred by PST, as adjusted for the non-tax deductible goodwill impairment charge. The decrease in the tax expense was partially offset by a discrete tax item related to our foreign operations recorded during the current period. The decrease in the effective tax rate for 2014 to (3.5)% compared to 2013 of 12.0% was due to the 2014 recognition of a tax benefit on the PST operating loss which was offset by the impact of the non-tax deductible PST goodwill impairment charge and the discrete tax item discussed above.
Year Ended December 31, 2013 Compared To Year Ended December 31, 2012
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||||||||
increase / | ||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | |||||||||||||||||
Net sales | $ | 659,486 | 100.0 | % | $ | 612,466 | 100.0 | % | $ | 47,020 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 453,531 | 68.8 | 427,199 | 69.8 | 26,332 | |||||||||||||||
Selling, general and administrative | 123,180 | 18.7 | 126,417 | 20.6 | (3,237 | ) | ||||||||||||||
Design and development | 40,372 | 6.1 | 38,945 | 6.4 | 1,427 | |||||||||||||||
Operating income | 42,403 | 6.4 | 19,905 | 3.2 | 22,498 | |||||||||||||||
Interest expense, net | 18,096 | 2.7 | 19,869 | 3.2 | (1,773 | ) | ||||||||||||||
Equity in earnings of investee | (476 | ) | (0.1 | ) | (760 | ) | (0.1 | ) | 284 | |||||||||||
Other expense, net | 1,457 | 0.3 | 4,606 | 0.7 | (3,149 | ) | ||||||||||||||
Income (loss) before income taxes from continuing operations | 23,326 | 3.5 | (3,810 | ) | (0.6 | ) | 27,136 | |||||||||||||
Provision (benefit) for income taxes from continuing operations | 2,797 | 0.4 | (33 | ) | - | 2,830 | ||||||||||||||
Income (loss) from continuing operations | 20,529 | 3.1 | (3,777 | ) | (0.6 | ) | 24,306 | |||||||||||||
Income (loss) from discontinued operations, net of tax | (4,021 | ) | (0.6 | ) | 7,525 | 1.2 | (11,546 | ) | ||||||||||||
Net income | 16,508 | 2.5 | 3,748 | 0.6 | 12,760 | |||||||||||||||
Net income (loss) attributable to noncontrolling interest | 1,377 | 0.2 | (1,613 | ) | (0.3 | ) | 2,990 | |||||||||||||
Net income attributable to Stoneridge, Inc. | $ | 15,131 | 2.3 | % | $ | 5,361 | 0.9 | % | $ | 9,770 |
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||||||||||
Control Devices | $ | 291,145 | 44.1 | % | $ | 267,860 | 43.7 | % | $ | 23,285 | 8.7 | % | ||||||||||||
Electronics | 189,809 | 28.8 | 164,196 | 26.8 | 25,613 | 15.6 | % | |||||||||||||||||
PST | 178,532 | 27.1 | 180,410 | 29.5 | (1,878 | ) | (1.0 | )% | ||||||||||||||||
Total net sales | $ | 659,486 | 100.0 | % | $ | 612,466 | 100.0 | % | $ | 47,020 | 7.7 | % |
Our Control Devices segment net sales increased due to higher volume and new products primarily in our North American automotive vehicle market of $23.9 million during 2013 when compared to 2012. This increase was partially offset by a volume decrease in commercial vehicle products of $0.3 million.
Our Electronics segment net sales increased primarily due to a $25.3 million increase in sales of our European commercial vehicle products resulting from higher volume and new product sales.
Our Wiring segment net sales decreased due to volume decreases in our commercial vehicle products of $37.5 million primarily related to a significant customer.
Our PST segment net sales decreased slightly from 2012 despite a 9.9% increase in net sales in local currency (Brazilian Real). However, due to an unfavorable foreign currency translation of approximately $19.7 million, the U.S. dollar denominated net sales decreased byor 10.9%.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | Dollar | Percent | |||||||||||||||||||||||||||||||||||||||||||||
increase / | increase / | increase / | increase / | |||||||||||||||||||||||||||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||||||||||||||||||||||||||||||
North America | $ | 594,854 | 62.8 | % | $ | 611,756 | 65.2 | % | $ | (16,902 | ) | (2.8 | )% | $ | 301,592 | 45.7 | % | $ | 277,850 | 45.3 | % | $ | 23,742 | 8.5 | % | |||||||||||||||||||||||
South America | 178,532 | 18.8 | 180,410 | 19.2 | (1,878 | ) | (1.0 | )% | 178,532 | 27.1 | 180,410 | 29.5 | (1,878 | ) | (1.0 | )% | ||||||||||||||||||||||||||||||||
Europe and Other | 174,444 | 18.4 | 146,347 | 15.6 | 28,097 | 19.2 | % | 179,362 | 27.2 | 154,206 | 25.2 | 25,156 | 16.3 | % | ||||||||||||||||||||||||||||||||||
Total net sales | $ | 947,830 | 100.0 | % | $ | 938,513 | 100.0 | % | $ | 9,317 | 1.0 | % | $ | 659,486 | 100.0 | % | $ | 612,466 | 100.0 | % | $ | 47,020 | 7.7 | % |
The North American geographic location consists of the results of our operations in the United States and Mexico.
The decreaseincrease in North American net sales was primarily attributable to decreased sales in our North American commercial and agricultural vehicle markets of $37.0 million and $4.4 million, respectively, which were partially offset by higher North American automotive vehicle sales of $25.2$23.9 million. Our decrease in net sales in South America was primarily due to an unfavorable foreign currency translation which more than offset the sales volume increase. Our increase in net sales in Europe and Other was primarily due to increased sales of European commercial vehicle market products of $25.3 million and a favorable foreign currency fluctuation.million.
Cost of Goods Sold and Gross Margin. Cost of goods sold increased by 1.1%6.2% primarily due to a 1.0%7.7% increase in sales and higher labor costs incurred in response to customer forecasted sales in the second half of 2013 which did not transpire.sales. Costs of goods sold during 2012 was unfavorably affected during 2012 as a result of a $3.2 million inventory purchase accounting fair value adjustment and $0.7 million in business realignment charges related to PST, neither of which recurred in 2013. As a result, ourOur material cost as a percentage of net sales improved to 51.0%remained consistent at 46.7% for both 2013 compared to 52.5% forand 2012. Our gross margin remained consistent at 23.9%increased to 31.2% for both 2013 andfrom 30.2% in 2012.
Our Control Devices segment gross margin increased due to a 8.7% increase in net sales and a favorable change in mix of products sold. In addition, material costs were favorably impacted by lower component costs.
Our Electronics segment gross margin increased primarily due to a 15.6% increase in net sales and a favorable change in mix of products sold.
Our Wiring segment gross margin declined due to an 11.6% decrease in net sales, higher labor costs incurred in response to customer forecasted sales which did not transpire and other operating inefficiencies including premium freight, which were partially offset by lower raw material costs.
Our PST segment gross margin improved despite a 1.0% decrease in net sales due to cost savings realized from a business realignment initiative that occurred in the second quarter of 2012. PST gross margin also improved due to a $3.2 million inventory purchase accounting adjustment and $0.7 million of business realignment charges in 2012, neither of which recurred in 2013, but were offset by higher component costs in 2013 which were unfavorably impacted by changesas a result of an unfavorable change in foreign currency exchange rates.
Selling, General and Administrative Expenses. SG&A expenses decreased by $9.6$3.2 million during 2013 compared to 2012 primarily due to decreases in sales, general and administrative costs of $10.1 million offset by higher product development expenses of $0.5 million. Sales, general and administrative costs decreased primarily as a result of lower employee benefit costs, commissions and professional fees. In 2012, the Company incurred professional fees associated with the acquisition of controlling interest in PST and integration thereof. Our PST segment benefited in 2013 from the business realignment activities described below.
In response to a change in customer demand, the PST segment incurred business realignment charges of $1.6 million for the year ended December 31, 2012, of which $0.9$0.6 million and $0.7 million was recorded in SG&A expenses and cost of goods sold, respectively, with the remainder recorded in cost of goods sold.design and development expense. The charges consist primarily of severance costs related to workforce reductions.
There were no significant restructuring or business realignment charges related to the Control Devices Electronics or WiringElectronics reportable segments during the years ended December 31, 2013 or 2012.
Design and Development.Design and development costs increased by $1.4 million during 2013 due to lower cost reimbursements in our Electronics segment and higher product development costs in our Controls Devices segment, which was partially offset by lower product development costs in our PST segment.
Operating Income (Loss). Operating income (loss) is summarized in the following table by continuing reportable segment (in thousands):
Dollar | Percent | |||||||||||||||
increase / | increase / | |||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||
Control Devices | $ | 32,331 | $ | 20,945 | $ | 11,386 | 54.4 | % | ||||||||
Electronics | 20,732 | 15,851 | 4,881 | 30.8 | % | |||||||||||
PST | 7,211 | 583 | 6,628 | 1,136.9 | % | |||||||||||
Unallocated corporate | (17,871 | ) | (17,474 | ) | (397 | ) | (2.3 | )% | ||||||||
Operating Income | $ | 42,403 | $ | 19,905 | $ | 22,498 | 113.0 | % |
Our Control Devices segment operating income increased due to higher sales, a favorable change in mix of products sold and lower component costs.
Our Electronics segment operating income increased due to higher sales and favorable change in mix of products sold.
Our PST segment operating income increased despite the slight decline in sales in U.S. dollars due to lower operating costs, primarily SG&A expenses associated with the business realignment initiative that occurred in mid-2012. PST operating income was negatively impacted in 2012 by a $3.2 million inventory purchase accounting adjustment and $1.6 million in business realignment charges, neither of which recurred in 2013, but were partially offset by higher component costs in 2013.
The decrease in operating income from corporate activities is primarily related to higher net corporate costs.
Operating income by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 18,538 | 43.7 | % | $ | 11,210 | 56.3 | % | $ | 7,328 | 65.4 | % | ||||||||||||
South America | 7,211 | 17.0 | 583 | 2.9 | 6,628 | 1,136.9 | % | |||||||||||||||||
Europe and Other | 16,654 | 39.3 | 8,112 | 40.8 | 8,542 | 105.3 | % | |||||||||||||||||
Operating income | $ | 42,403 | 100.0 | % | $ | 19,905 | 100.0 | % | $ | 22,498 | 113.0 | % |
North American operating income includes interest expense, net of approximately $15.9 million for each of the years ended December 31, 2013 and 2012, respectively.
Our North American results increased primarily as a result of higher sales in our North American automotive vehicle market during 2013 as compared to 2012. The increase in operating income in South America was primarily due to higher sales in local currency, lower operating costs associated with the business realignment initiative that occurred in mid-2012, lower cost of sales related to an inventory purchase accounting adjustment and business realignment charges in 2012. Our operating income in Europe and Other were favorably affected by our increased European commercial vehicle market sales during 2013.
Interest Expense, net.Interest expense, net decreased by $1.7$1.8 million during 2013 when compared to 2012 primarily from reduced interest on our PST term notes and revolving credit facilities due to lower average outstanding loan balances.
Equity in Earnings of Investees.Investee.Equity earnings for Minda decreased by $0.3 million to $0.5 million for the year ended December 31, 2013 compared to $0.8 million for the year ended December 31, 2012 due to lower sales and an unfavorable change in foreign exchange rates.
Other Expense, net. Other expense, net was $1.1$1.5 million for 2013 compared to $4.9$4.6 million for 2012. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the consolidated statements of operations. Our results for the years ended December 31, 2013 and 2012 were unfavorably affected by $1.8$2.1 million and $4.3$4.0 million, respectively, due to the volatility in certain foreign exchange rates, primarily the Brazilian real. Most of the unfavorable foreign currency loss during 2012 was related to the translation of PST’s U.S. dollar-denominated debt, the balance of which has decreased in 2013. Also, our PST segment received $0.6 million of income in 2013 associated with deposits at a financial institution.
Income Before Income Taxes. Income (loss) before income taxes is summarized in the following table by reportable segment (in thousands):
Dollar | Percent | |||||||||||||||
increase / | increase / | |||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||
Control Devices | $ | 26,914 | $ | 15,048 | $ | 11,866 | 78.9 | % | ||||||||
Electronics | 15,596 | 10,049 | 5,547 | 55.2 | % | |||||||||||
Wiring | (10,074 | ) | (289 | ) | (9,785 | ) | NM | |||||||||
PST | 5,395 | (4,985 | ) | 10,380 | NM | |||||||||||
Other corporate activities | (1,117 | ) | 635 | (1,752 | ) | NM | ||||||||||
Corporate interest expense | (15,980 | ) | (15,898 | ) | (82 | ) | (0.5 | )% | ||||||||
Income before income taxes | $ | 20,734 | $ | 4,560 | $ | 16,174 | 354.7 | % |
NM – not meaningful
Our Control Devices segment income before income taxes increased due to higher sales, a favorable change in mix of products sold and lower component costs.
Our Electronics segment income before income taxes increased due to higher sales and favorable change in mix of products sold.
Our Wiring segment increase in loss before income taxes was primarily due to lower sales combined with higher labor costs incurred in response to customer forecasted sales in the second half of 2013 which did not transpire and other operating inefficiencies including higher premium freight, which were partially offset by lower raw material costs.
Our PST segment income (loss) before income taxes increased despite the slight decline in sales in U.S. dollars due to lower operating costs, primarily SG&A expenses associated with the business realignment initiative that occurred in mid-2012 and lower interest expense of $1.2 million. PST income before income taxes was lower in 2012 due to a $3.2 million inventory purchase accounting adjustment and $1.6 million in business realignment charges, neither of which recurred in 2013 but were offset by higher component costs in 2013. In addition, PST was less unfavorably affected by the volatility in foreign exchange rates by $1.9 million in the current year primarily related to its U.S dollar-denominated debt, the impact of which was $1.3 million and $3.2 million for the years ended December 31, 2013 and 2012, respectively.
The decrease in income (loss) before income taxes from other corporate activities is primarily related to higher net corporate costs and lower equity earnings from Minda, partially offset by lower foreign currency losses.
Income (loss) before income taxes by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2013 | 2012 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 3,815 | 18.4 | % | $ | 6,287 | 137.9 | % | $ | (2,472 | ) | (39.3 | )% | |||||||||||
South America | 5,395 | 26.0 | (4,985 | ) | (109.3 | ) | 10,380 | NM | ||||||||||||||||
Europe and Other | 11,524 | 55.6 | 3,258 | 71.4 | 8,266 | 253.7 | % | |||||||||||||||||
Income before income taxes | $ | 20,734 | 100.0 | % | $ | 4,560 | 100.0 | % | $ | 16,174 | 354.7 | % |
The North American geographic location consists of the results of our operations in the United States and Mexico.
North American income before income taxes includes interest expense, net of approximately $15.8 million and $15.7 million for the years ended December 31, 2013 and 2012, respectively.
Our North American results declined primarily as a result of decreased sales to our North American commercial vehicle market customers and higher labor costs in response to higher labor costs incurred in response to customer forecasted sales which did not transpire. These negative effects on income before income taxes in North America were partially offset by higher sales in our North American automotive vehicle market and lower SG&A expenses during 2013 as compared to 2012. The increase in profitability in South America was primarily due to higher sales in local currency, lower operating costs associated with the business realignment initiative that occurred in mid-2012, lower interest expense and lower cost of sales related to an inventory purchase accounting adjustment and business realignment charges in 2012 and lower foreign currency losses. Our results in Europe and Other were favorably affected by our increased European commercial vehicle market sales during the current period.
Provision for Income Taxes. We recognized aan income tax provision for income taxes of $4.2$2.8 million or 20.4% of our income before income taxes, and $0.8$0.0 million or 17.8% of income before income taxes, for U.S. federal, state and foreign income taxes for 2013 and 2012, respectively. We continuehave continued to assert that it is more-likely-than-not that our U.S. and certain foreign deferred tax assets will not be realized, and therefore we provide a valuation allowance offsetting U.S. federal, state and certain foreignthose deferred tax assets. The increase in tax expense for the year ended December 31, 2013 compared to the same period for 2012 was related to the improved financial performance of our Swedish and Brazilian operations. The results of our U.S. operations do not impact tax expense due to the valuation allowance. However, the income or loss of our U.S. operations does impact the effective tax rate. The effective tax rate for 2013 increased to 12.0% from (0.8)% in 2012 primarily due to athe improvement of our Swedish and Brazilian operations as well as the decline in the financial performance of our U.S. operations.
Year EndedLiquidity and Capital Resources
Summary of Cash Flows for the years ended December 31, 2012 Compared To Year Ended December 31, 20112014 and 2013 (in thousands):
Dollar | ||||||||||||
increase / | ||||||||||||
2014 | 2013 | (decrease) | ||||||||||
Net cash provided by (used for): | ||||||||||||
Operating activities | $ | 19,815 | $ | 43,684 | $ | (23,869 | ) | |||||
Investing activities | 45,720 | (25,237 | ) | 70,957 | ||||||||
Financing activities | (82,058 | ) | (503 | ) | (81,555 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (3,281 | ) | 326 | (3,607 | ) | |||||||
Net change in cash and cash equivalents | $ | (19,804 | ) | $ | 18,270 | $ | (38,074 | ) |
As of December 31, 2011, we completed the acquisition of an additional 24% controlling interest in PST. As a result, we own 74% of the outstanding equity of PST. In exchange for the controlling interest in PST, we paid the sellers $29.7 million
The decrease in cash and issued 1.9 million Common Shares of the Company. Because a controlling interest in PST was not acquired until the close of business on December 31, 2011, the resultsprovided by operating activities for the year ended December 31, 2011 were accounted for as an unconsolidated joint venture under the equity method of accounting such that our 50% portion of PST’s after-tax earnings were included within equity in earnings of investees in the statements of operations.
PST’s results for the year ended December 31, 2012 were consolidated such that 100% of PST’s operations were included in each line from sales through net income in the Company’s statements of operations with the 26% noncontrolling interest deducted in the net income (loss) attributable to noncontrolling interest line and used to compute our portion of PST’s net income (loss). Due to the acquisition of controlling interest, the Company fair valued the assets and liabilities of PST as of December 31, 2011. The depreciation and amortization associated with these purchase accounting adjustments related to inventory, property, plant and equipment and finite lived intangibles have been included in the statements of operations for the year ended December 31, 2012.
Consolidated statements of operations as a percentage of net sales are presented in the following table (in thousands):
Dollar | ||||||||||||||||||||
increase / | ||||||||||||||||||||
Years ended December 31 | 2012 | 2011 | (decrease) | |||||||||||||||||
Net sales | $ | 938,513 | 100.0 | % | $ | 765,373 | 100.0 | % | $ | 173,140 | ||||||||||
Costs and expenses: | ||||||||||||||||||||
Cost of goods sold | 713,869 | 76.1 | 618,596 | 80.8 | 95,273 | |||||||||||||||
Selling, general and administrative | 195,915 | 20.8 | 128,306 | 16.8 | 67,609 | |||||||||||||||
Goodwill impairment charge | - | - | 4,945 | 0.6 | (4,945 | ) | ||||||||||||||
Operating income | 28,729 | 3.1 | 13,526 | 1.8 | 15,203 | |||||||||||||||
Interest expense, net | 20,033 | 2.1 | 17,234 | 2.3 | 2,799 | |||||||||||||||
Equity in earnings of investees | (760 | ) | (0.1 | ) | (10,034 | ) | (1.3 | ) | 9,274 | |||||||||||
Gain on previously held equity interest | - | - | (65,372 | ) | (8.5 | ) | 65,372 | |||||||||||||
Other expense, net | 4,896 | 0.6 | 56 | - | 4,840 | |||||||||||||||
Income before income taxes | 4,560 | 0.5 | 71,642 | 9.3 | (67,082 | ) | ||||||||||||||
Provision for income taxes | 812 | 0.1 | 26,105 | 3.4 | (25,293 | ) | ||||||||||||||
Net income | 3,748 | 0.4 | 45,537 | 5.9 | (41,789 | ) | ||||||||||||||
Net loss attributable to noncontrolling interest | (1,613 | ) | (0.2 | ) | (3,820 | ) | (0.5 | ) | 2,207 | |||||||||||
Net income attributable to Stoneridge, Inc. | $ | 5,361 | 0.6 | % | $ | 49,357 | 6.4 | % | $ | (43,996 | ) |
Net Sales. Net sales for our reportable segments, excluding inter-segment sales are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2012 | 2011 | (decrease) | (decrease) | ||||||||||||||||||||
Control Devices | $ | 267,859 | 28.6 | % | $ | 259,316 | 33.9 | % | $ | 8,543 | 3.3 | % | ||||||||||||
Electronics | 164,196 | 17.5 | 180,508 | 23.6 | (16,312 | ) | (9.0 | )% | ||||||||||||||||
Wiring | 326,048 | 34.7 | 325,549 | 42.5 | 499 | 0.2 | % | |||||||||||||||||
PST | 180,410 | 19.2 | - | - | 180,410 | NM | ||||||||||||||||||
Total net sales | $ | 938,513 | 100.0 | % | $ | 765,373 | 100.0 | % | $ | 173,140 | 22.6 | % |
NM – Not meaningful
Our Control Devices segment sales increased due to higher volume in our served markets by approximately $6.4 million during 2012 when compared to the prior year. In particular, volume increases in the North American automotive vehicle and commercial vehicle markets were approximately $4.3 million and $2.1 million, respectively.
Our Electronics segment sales decreased primarily due to a decrease in our European automotive product sales and an unfavorable foreign currency translation of approximately $5.5 million related to our European operations during 2012 when compared to 2011.
Our Wiring segment sales were consistent with 2011 as volume increases in the North American agricultural vehicle market were offset by volume decreases in our commercial vehicle products primarily related to a significant customer.
Our PST segment had revenue of $180.4 million for the year ended December 31, 2012. PST revenues were negatively impacted by a weakened Brazilian economy and an unfavorable foreign currency translation.
Net sales by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2012 | 2011 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 611,756 | 65.2 | % | $ | 601,490 | 78.6 | % | $ | 10,266 | 1.7 | % | ||||||||||||
South America | 180,410 | 19.2 | - | - | 180,410 | NM | ||||||||||||||||||
Europe and Other | 146,347 | 15.6 | 163,883 | 21.4 | (17,536 | ) | (10.7 | )% | ||||||||||||||||
Total net sales | $ | 938,513 | 100.0 | % | $ | 765,373 | 100.0 | % | $ | 173,140 | 22.6 | % |
The North American geographic location consists of the results of our operations in the United States and Mexico.
The increase in North American net sales for the year ended December 31, 2012 was primarily attributable to increased sales volume in our North American agricultural vehicle market of $23.5 million, partially offset by lower commercial vehicle sales volume of $17.4 million primarily related to a significant customer. Our net sales in South America were due to the acquisition of a controlling interest in PST such that its revenues were consolidated during 2012. Our decrease in net sales in Europe and Other was primarily due to decreased sales volume of European automotive vehicle market products and unfavorable foreign currency translation of approximately $5.3 million in comparison to the prior year.
Cost of Goods Sold. Cost of goods sold increased by $95.3 million primarily due to the consolidation of PST, which had cost of goods sold of $108.9 million for the year ended December 31, 2012 which included purchase accounting inventory costs of $3.2 million and business realignment charges of $0.7 million. Cost of goods sold was favorably impacted by improved productivity, lower overhead costs and favorable changes to foreign exchange rates and commodity prices in our Wiring segment, partially offset by an unfavorable change in mix of products sold in our Control Devices segment.
Our gross margin increased by 4.7% to 23.9% for the year ended December 31, 2012 compared to 19.2% for the year ended December 31, 2011 primarily due to the consolidation of PST in our 2012 results, which had a gross margin of 39.6%. In addition, improvements in labor productivity, lower overhead resulting from lower premium freight costs and favorable fluctuations in foreign currency exchange rates favorably affected our gross margin.
Our Control Devices segment gross margin declined despite higher sales primarily due to an unfavorable change in mix of products sold during 2012.
Our Electronics segment gross margin decreased from 2011 primarily due to lower sales.
Our Wiring segment gross margin increased from 2011 despite consistent sales due to improvements in labor productivity, lower overhead primarily related to lower premium freight and favorable fluctuations in foreign currency exchange rates and certain commodity prices.
Selling, General and Administrative. SG&A expenses increased by $67.6 million for the year ended December 31, 2012 primarily due to the consolidation of PST in our 2012 results which had SG&A expenses of $70.9 million which included purchase accounting amortization of $5.7 million and business realignment charges of $0.9 million. Product development expenses included within SG&A increased by $9.5 million to $44.8 million for the year ended December 31, 2012 from $35.3 million for the year ended December 31, 2011 primarily due to PST’s product development expenses which were $8.4 million for the year ended December 31, 2012.
In response to a change in customer demand, the PST segment incurred business realignment charges of $1.6 million for the year ended December 31, 2012, of which $0.9 million was recorded in SG&A expenses with the remainder recorded in cost of goods sold. The charges consist primarily of severance costs related to workforce reductions.
Costs incurred for the Electronics segment during the years ended December 31, 2012 and 2011 related to restructuring initiatives for contract termination costs in connection with our cancelled lease in Mitcheldean, United Kingdom. The Company continued negotiations in regards to this lease and recorded additional amounts to reflect the expected costs to be paid until a settlement agreement was finalized to modify the terms of and the obligation associated with the property in the third quarter of 2012. The settlement and related obligation was consistent with previous estimates. Restructuring expenses that were general and administrative in nature were included in the Company’s consolidated statements of operations as a component of SG&A expenses for the years ended December 31, 2012 and 2011. In connection with the restructuring initiative, the Company recorded restructuring charges related to a contract termination during the year ended December 31, 2012 of $0.3 million as part of SG&A expense. All restructuring charges result in cash outflows. Contract termination costs represent expenditures associated with long-term lease obligations that were cancelled as part of the restructuring initiatives and were $1.0 million for the year ended December 31, 2011.
Goodwill Impairment Charge.During the fourth quarter of 2011, we performed our annual goodwill impairment test. As a result, our goodwill related to Bolton Conductive Systems, LLC (“BCS”) was determined to be impaired and was partially written down.A goodwill impairment charge of $4.9 million was recorded during the year ended December 31, 2011. A portion of the goodwill impairment charge, $2.4 million, representing our minority partner’s ownership interest, was recognized as an increase in net loss attributable to noncontrolling interest on the consolidated statements of operations for the year ended December 31, 2011. We recognized the goodwill impairment charge within our Wiring reportable segment. The goodwill impairment charge was due to a reduction in military and defense related spending by customers since the acquisition of BCS.
Interest Expense, net.Interest expense, net increased by $2.8 million during 2012 when compared to the same period in the prior year primarily due to interest on PST’s debt, which was $2.4 million for the year ended December 31, 2012, and a higher Credit Facility average outstanding balance during 2012.
Equity in Earnings of Investees.Equity earnings of investees decreased by $9.3 million which was primarily due to the acquisition of the controlling interest in PST as of December 31, 2011. Prior to the acquisition, PST was an unconsolidated joint venture accounted for under the equity method of accounting. As of and for the year ended December 31, 2012, PST is a consolidated subsidiary of the Company. Equity earnings for PST were $8.8 million for the year ended December 31, 2011. Equity earnings for Minda decreased by $0.4 million to $0.8 million for the year ended December 31, 2012 from $1.2 million for the year ended December 31, 2011. This decrease was primarily due to an unfavorable change in the foreign exchange rates in 2012 compared to 2011.
Gain on Previously Held Equity Interest.As a result of obtaining a controlling interest in PST on December 31, 2011, the Company’s previously held equity interest in PST of 50% was remeasured to an acquisition date fair value. As a result, we recognized a one-time non-cash gain of $65.4 million related to the acquisition.
Other Expense, net. Other expense, net was $4.9 million for the year ended December 31, 2012 compared to $0.1 million for the year ended December 31, 2011. We record certain foreign currency transaction and forward currency hedge contract gains and losses as a component of other expense, net on the consolidated statements of operations. Our results for the year ended December 31, 2012 were unfavorably affected due to the volatility in certain foreign exchange rates between periods2014 compared to the year ended December 31, 2011. The majority of the increase in other expense, net relates to the foreign currency translation losses, predominantly for PST’s U.S. dollar denominated debt during 2012.
Income Before Income Taxes. Income (loss) before income taxes is summarized in the following table by reportable segment (in thousands):
Dollar | Percent | |||||||||||||||
increase / | increase / | |||||||||||||||
Years ended December 31 | 2012 | 2011 | (decrease) | (decrease) | ||||||||||||
Control Devices | $ | 15,048 | $ | 17,145 | $ | (2,097 | ) | (12.2 | )% | |||||||
Electronics | 10,049 | 14,743 | (4,694 | ) | (31.8 | )% | ||||||||||
Wiring | (289 | ) | (17,119 | ) | 16,830 | 98.3 | % | |||||||||
PST | (4,985 | ) | - | (4,985 | ) | NM | ||||||||||
PST - equity in earnings of investee | - | 8,805 | (8,805 | ) | NM | |||||||||||
Other corporate activities | 635 | 63,461 | (62,826 | ) | NM | |||||||||||
Corporate interest expense | (15,898 | ) | (15,393 | ) | (505 | ) | (3.3 | )% | ||||||||
Income before income taxes | $ | 4,560 | $ | 71,642 | $ | (67,082 | ) | (93.6 | )% |
NM – not meaningful
The decrease in income before income taxes in our Control Devices segment during the year ended December 31, 2012 when compared to the same period in the prior year was due to a change in mix of products sold, which more than offset the increase in sales.
The decrease in income before taxes in the Electronics reportable segment2013 was primarily due to lower saleshigher working capital levels as well as a $6.5 million decrease in net income excluding the impacts of the non-cash PST goodwill impairment and losses on the sale of the Wiring business and early extinguishment of debt. Our receivable terms and collections rates have remained consistent between periods presented.
The increase in net cash provided by investing activities for 2014 was due to $71.4 million in cash received from the sale of the Wiring business, which was partially offset by lower SG&A expenses.a $0.6 million increase in capital expenditures.
The lower loss before income taxesincrease in the Wiring reportable segmentnet cash used for financing activities for 2014 was due to improvements in labor productivity, lower overhead including lower premium freight, favorable fluctuations in foreign currency exchange rates and certain commodity prices. The improvement in labor productivity and premium freight that positively affected our results for the year ended December 31, 2012 was $6.5 million. The decreases in foreign exchange rates and certain commodity prices also positively impacted our results by approximately $5.9 million and $1.0 million, respectively.
Loss before income taxes at PST for the year ended December 31, 2012 incorporates 100% of PST’s pre-tax losses which included depreciation and amortization of the purchase accounting adjustments related to inventory, property and equipment and finite lived intangibles of $9.2 million and business realignment charges of $1.6 million. PST’s performance was negatively impacted by lower sales as a result of a weakened Brazilian economy, an unfavorable mix of products sold and an unfavorable change in foreign currency translation, while benefiting from lower operating costs associated with the business realignment initiative that occurred in the second quarter of 2012. Income before income taxes at PST for the year ended December 31, 2011 included only our 50% portion of PST’s after-tax earnings within equity in earnings of investees.
The decrease in income before income taxes from other corporate activities was primarily due to the one-time non-cash gain on previously held equity interest of $65.4 million in 2011 related to the acquisition of controlling interest in PST which occurred during the year ended December 31, 2011.
Income (loss) before income taxes by geographic location are summarized in the following table (in thousands):
Dollar | Percent | |||||||||||||||||||||||
increase / | increase / | |||||||||||||||||||||||
Years ended December 31 | 2012 | 2011 | (decrease) | (decrease) | ||||||||||||||||||||
North America | $ | 6,287 | 137.9 | % | $ | 65,167 | 91.0 | % | $ | (58,880 | ) | (90.4 | )% | |||||||||||
South America | (4,985 | ) | (109.3 | ) | 8,805 | 12.3 | (13,790 | ) | NM | |||||||||||||||
Europe and Other | 3,258 | 71.4 | (2,330 | ) | (3.3 | ) | 5,588 | NM | ||||||||||||||||
Income before income taxes | $ | 4,560 | 100.0 | % | $ | 71,642 | 100.0 | % | $ | (67,082 | ) | (93.6 | )% |
The North American geographic location consists of the resultsredemption of our operations in the United States and Mexico.
Our North American results declined as a result of the one-time non-cash gain of $65.4senior secured notes including redemption premium totaling $183.0 million, related to the acquisition of controlling interest in PST which occurred during the year ended December 31, 2011. Offsetting this decrease were lower operating costs related to improved labor productivity, lower overhead including lower premium freight and favorable changes in foreign currency exchange rates and commodity prices, primarily the Mexican peso and copper, during the year ended December 31, 2012 as compared to 2011. North American income before income taxes includes interest expense, net of approximately $15.7 million and $15.5 million for the years ended December 31, 2012 and 2011, respectively.
Our South American results are composed entirely of our PST segment. Our South American results include all of PST’s pre-tax losses for the year ended December 31, 2012 while only 50% of PST’s after-tax earnings are included for the year ended December 31, 2011 as PST was consolidated in the current period versus being an equity method investment in 2011. PST’s 2012 results were negatively impacted by depreciation and amortization of purchase accounting adjustments totaling $9.2 million and business realignment charges of $1.6 million.
Our European and other results improved from the same period in 2011 due lower SG&A expenses offset by lower sales in the European automotive vehicle market.
Provision for Income Taxes. We recognized a provision for income taxes of $0.8 million, or 17.8% of our income before income taxes, and $26.1 million, or 36.4% of income before income taxes, for U.S. federal, state and foreign income taxes for 2012 and 2011, respectively. We continue to assert that it is more-likely-than-not that our U.S. and certain foreign deferred tax assets will not be realized and provides a valuation allowance offsetting U.S. federal, state and certain foreign deferred tax assets. The decrease in tax expense for the year ended December 31, 2012 compared to the same period for 2011 was primarily attributable to the tax provided in 2011 related to the gain recognized on the write-up to fair market value of the historic investment in PST. In addition, the overall tax expense related to the investment in PST was lower in 2012 as compared to 2011 due to the consolidation of PST effective December 31, 2011. Finally, the decrease in tax expense was partially offset by providing a valuation allowance against certain deferred tax assets related tonet borrowings on our European operations in 2012. The effective tax rate for 2012 declined primarily due to the improvement in U.S. results which do not attract tax due to the valuation allowance.
LiquidityCredit Facility and Capital Resourcesother debt of $100.0 million and $4.5 million, respectively.
Summary of Cash Flows for the years ended December 31, 2013 and 2012 (in thousands):
Dollar | ||||||||||||
increase / | ||||||||||||
2013 | 2012 | (decrease) | ||||||||||
Net cash provided by (used for): | ||||||||||||
Operating activities | $ | 43,684 | $ | 75,545 | $ | (31,861 | ) | |||||
Investing activities | (25,237 | ) | (45,610 | ) | 20,373 | |||||||
Financing activities | (503 | ) | (65,475 | ) | 64,972 | |||||||
Effect of exchange rate changes on cash and cash equivalents | 326 | 1,364 | (1,038 | ) | ||||||||
Net change in cash and cash equivalents | $ | 18,270 | $ | (34,176 | ) | $ | 52,446 |
The decrease in cash provided by operating activities for the year ended December 31, 2013 compared to the year ended December 31, 2012 was primarily due to maintaining higher working capital levels at our PST and our former Wiring segments which were attributable to planned production increases which offset a $12.8 million increase in net income. Our receivable terms and collections rates have remained consistent between periods presented. These uses of cash were partially offset by increases in accounts payable and accrued expenses of $16.8 million and $2.7 million, respectively, during 2013 compared to 2012.
The decrease in net cash used for investing activities for 2013 was due to a $19.8 million payment made in conjunction with the acquisition of a controlling interest in PST during 2012.
The decrease in net cash used for financing activities was primarily due to lower principal payments made on the asset-based Credit Facility and PST term loans.
Summary of Future Cash Flows for the years ended December 31, 2012 and 2011 (in thousands):
Dollar | ||||||||||||
increase / | ||||||||||||
2012 | 2011 | (decrease) | ||||||||||
Net cash provided by (used for): | ||||||||||||
Operating activities | $ | 75,545 | $ | 921 | $ | 74,624 | ||||||
Investing activities | (45,610 | ) | (29,783 | ) | (15,827 | ) | ||||||
Financing activities | (65,475 | ) | 37,522 | (102,997 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents | 1,364 | (1,903 | ) | 3,267 | ||||||||
Net change in cash and cash equivalents | $ | (34,176 | ) | $ | 6,757 | $ | (40,933 | ) |
The increase in cash provided by operating activities for the year ended December 31, 2012 from the year ended December 31, 2011 was primarily due to higher depreciation and amortization charges in 2012 due to the consolidation of PST and a reduction in accounts receivable and inventory balances of $60.9 million. Our cash provided by operating activities for the year ended December 31, 2011 was negatively affected by higher accounts receivable and inventory balances. Our receivable terms and collections rates have remained consistent between periods presented.
The increase in net cash used for investing activities relates to cash disbursements in conjunction with the acquisition of controlling interest in PST of $19.8 million in 2012 compared to $7.3 million in 2011. In 2011, we received proceeds of $3.9 million from the sale of our former Sarasota facility.
The increase in net cash used for financing activities was primarily due to payments made on the Credit Facility and the PST term notes during 2012 compared to Credit Facility borrowings to finance the acquisition of controlling interest in PST in 2011.
The following table summarizes our future cash outflows resulting from financial contracts and commitments, as of December 31, 20132014 (in thousands):
Less than | After | Less than | After | |||||||||||||||||||||||||||||||||||||
Total | 1 year | 2-3 years | 4-5 years | 5 years | Total | 1 year | 2-3 years | 4-5 years | 5 years | |||||||||||||||||||||||||||||||
Revolving Credit Facility | $ | 100,000 | $ | - | $ | - | $ | 100,000 | $ | - | ||||||||||||||||||||||||||||||
Debt | $ | 199,171 | $ | 12,187 | $ | 183,813 | $ | 2,114 | $ | 1,057 | 30,306 | 19,655 | 6,882 | 2,836 | 933 | |||||||||||||||||||||||||
Operating leases | 14,098 | 5,815 | 5,215 | 2,988 | 80 | 18,633 | 2,879 | 5,295 | 4,114 | 6,345 | ||||||||||||||||||||||||||||||
Total contractual obligations | $ | 213,269 | $ | 18,002 | $ | 189,028 | $ | 5,102 | $ | 1,137 | $ | 148,939 | $ | 22,534 | $ | 12,177 | $ | 106,950 | $ | 7,278 |
Management will continue to focus on reducingminimizing its weighted-average cost of capital and believes that cash flows from operations and the availability of funds from our Credit Facility will provide sufficient liquidity to meet our future growth and operating needs.
On October 4, 2010, we issued $175.0 million of senior secured notes. These senior secured notes bear interest at an annual rate of 9.5% and mature on October 15, 2017. The senior secured notes are redeemable, at our option, beginning October 15, 2014 at 104.75%. Interest payments are payable on April 15 and October 15 of each year. The senior secured notes indenture limits our restricted subsidiaries' amount of indebtedness, restricts certain payments and includes various other non-financial restrictive covenants, which to date have not been and are not expected to have an impact on our financing flexibility. The senior secured notes are guaranteed by all of our existing domestic restricted subsidiaries. All other restricted subsidiaries that guarantee any of our or our guarantors' indebtedness will also guarantee the senior secured notes.
On October 4, 2010, we entered into a fixed-to-variable interest rate swap agreement (the "Swap") with a notional amount of $45.0 million. The Swap was designated as a fair value hedge of the fixed interest rate obligation under our $175.0 million 9.5% senior secured notes due October 15, 2017. We pay variable interest equal to the six-month LIBOR plus 7.19% and we receive a fixed interest rate of 9.5% under the Swap. The critical terms of the Swap match the terms of the senior secured notes, including maturity of October 15, 2017, resulting in no hedge ineffectiveness.
As outlined in Note 4 to our condensed consolidated financial statements, our Credit Facility permits borrowing up to a maximum level of $100.0 million.$300.0 million which includes an accordion feature which allows the Company to increase the availability by up to $80.0 million upon the satisfaction of certain conditions. This variable rate facility provides us with lower borrowing rates than the 9.5% senior secured notes redeemed in 2014 and allows usprovides the flexibility to refinance other outstanding debt. At December 31, 2013 and 2012 there were no borrowings outstanding. The available borrowing capacity on our Credit Facility is based on eligible current assets, as defined. At December 31, 2013, we had undrawn borrowing capacity of $71.1 million based on eligible current assets.debt or finance acquisitions through September 2019. The Credit Facility contains certain financial performancecovenants that require the Company to maintain less than a maximum leverage ratio and more than a minimum interest coverage ratio. The Credit Facility also contains affirmative and negative covenants and events of default that are customary for credit arrangements of this type including covenants which would only constrain our borrowing capacity if our undrawn availability falls below $20.0 million. However,place restrictions do include limitsand/or limitations on the Company’s ability to borrow money, make capital expenditures operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15.0pay dividends. The Credit Facility had an outstanding balance of $100.0 million minus certain guarantees and obligations.at December 31, 2014. The Company was in compliance with all covenants at December 31, 2013.2014. The covenants included in our Credit Facility to date have not and are not expected to limit our financing flexibility.
PST maintains several termshort-term obligations and long-term loans used for working capital purposes including a newpurposes. At December 31, 2014, there was $28.0 million outstanding on the PST term loan entered into in March 2013 for 25,000 Brazilian real whose U.S. dollar equivalent outstanding balance was $10.7 millionloans. The PST loans at December 31, 2013. The new term loan matures on February 15, 2016 and interest is payable monthly at a fixed interest rate of 5.5%. At December 31, 2013, there was $21.72014 mature as follows: $17.4 million outstanding on these loans. Of the outstanding borrowings, $9.8 million is due in the next twelve months and is included on the December 31, 2013 consolidated balance sheets as a component of current portion of debt. The balance of $11.9 million is included on the December 31, 2013 consolidated balance sheets as a component of long-term debt and is comprised of $6.6 million that matures in 2015, $2.1$4.2 million in 2016, and annual maturities of approximately $1.1$2.7 million in 2017, through 2019. Depending on the specific loan, interest is payable either monthly or annually. The term loans due$1.4 million annually in the next twelve months have a fixed interest rate of 1.70% to 16.56%, while the long-term loans have a fixed interest rate of 4.0% to 5.5%. As of December 31, 20132018 and 2012, PST was2019, $0.4 million in compliance with all note covenants.2020 and $0.5 million in 2021.
The term loan for our Suzhou, China subsidiary is in the amount of 9.0 million Chinese yuan whichand matures in April 2015. The U.S. dollar equivalent outstanding loan balance was approximately $1.5 million at December 31, 2013, and2014. The Suzhou note is included on the consolidated balance sheets as a component of current portion of long-term debt. The term loan matures in February 2014. Interest is payable monthlyquarterly at 120.0% of the one-year lending rate published by The People's Bank of China multiplied by 125.0%. At December 31, 2013, the interest rate on the term loan was 7.0%.China.
The Company's wholly owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary's bank account up to a maximum level of 20.0 million Swedish krona, or $3.1$2.6 million, at December 31, 2013.2014. At December 31, 2013,2014, there were no overdrafts on the bank account.
Although the Company's notes and credit facilities contain various covenants, the violation of which would limit or preclude their use or accelerate the maturity, the Company has not experienced and does not expect these covenants to restrict our financing flexibility. The Company has been and expects to continue to remain in compliance with these covenants during the term of the notes and credit facilities.
Our future results could be unfavorably affected by increased commodity prices, specifically copper. Copper prices fluctuated during 2011, 2012 and 2013. We entered into fixed price commodity contracts for a portion of our 2013 copper purchases and a portion of our 2014 sales are subject to copper surcharge billings which would mitigate a portion of raw material cost increases. Our 2014 results could also be adversely affected by unfavorable foreign currency exchange rates. We have significant foreign denominated transaction exposure in certain locations, especially in Brazil, Argentina, Mexico, Sweden and Sweden.Estonia. We have entered into foreign currency forward contracts and maintain Mexican peso- and euro-denominated cash balances to reduce our exposure related to certain foreign currency fluctuations.
We have significant U.S. federal income tax net operating loss carryforwards and research credit carryforwards. The Internal Revenue Code Our future results could also be unfavorably affected by increased commodity prices as commodity fluctuations impact the cost of 1986, as amended (the "Code"), imposes an annual limitation on the ability of a corporation that undergoes an "ownership change" to use its net operating loss and credit carryforwards to reduce its tax liability. During the fourth quarter of 2010 we undertook a secondary offering. As a result of the secondary offering a substantial change in our ownership occurred and we experienced an ownership change pursuant to Section 382 of the Code. There was no impact to current or deferred income taxes resulting from the ownership change.raw material purchases.
At December 31, 2013,2014, we had a cash and cash equivalents balance of approximately $62.8$43.0 million, of which $30.0$17.4 million was held domesticallyin the United States and $32.8$25.6 million was held in foreign locations. Our cash balance was not restricted at December 31, 2013.
Contingencies
On May 24, 2013, the State Revenue Services of São Paulo issued a tax deficiency notice against PST, our 74% owned consolidated subsidiary, claiming that the vehicle tracking and monitoring services it provides should be classified as communication services, and therefore subject to the State Value Added Tax – ICMS. The State Revenue Services assessment imposed the 25.0% ICMS tax on all revenues of PST related to the vehicle tracking and monitoring services during the perioddecrease from January 2009 through December 2010. The Brazilian real (“R$”) and U.S. dollar equivalent (“$”) of the aggregate tax assessment is approximately R$92.5 million ($39.5 million) which is comprised of Value Added Tax – ICMS of R$13.2 million ($5.6 million), interest of R$11.4 million ($4.9 million) and penalties of R$67.9 million ($29.0 million).
The Company’s vehicle tracking and monitoring services are non-communication services, as defined under Brazilian tax law, subject to the municipal ISS tax, not communication services subject to state ICMS tax as claimed by the State Revenue Services of São Paulo. PST has, and will continue to collect the municipal ISS tax on the vehicle tracking and monitoring services in compliance with Brazilian tax law and will defend its tax position. PST has received a legal opinion that the merits of the case are favorable to PST, determining among other things that the imposition on the subsidiary of the State ICMS by the State Revenue Services of São Paulo is not in accordance with the Brazilian tax code. Management believes, based on the legal opinion of PST’s Brazilian legal counsel and the results of the Brazil Administrative Court's ruling in favor of another vehicle tracking and monitoring company related to the tax deficiency notice it received, the likelihood of loss is not probable although it may take years to resolve. As a result of the above, as of December 31, 2013, no accrual has been recorded with respect to the tax assessment. An unfavorable judgment on this issue for the years assessed and for subsequent years could result in significant costs to PST and adversely affect its results of operations.
In addition, PST has civil, labor and other tax contingencies for which the likelihood of loss is deemed to be reasonably possible, but not probable, by its legal advisors, and, therefore, no accrual has been recorded. Such contingencies amounted to $11.5 million and $11.9$62.8 million at December 31, 2013 was primarily due to the use of cash to redeem the 9.5% senior secured notes in October 2014.
Commitments and December 31, 2012. An unfavorable outcome on this issue could result in significant costContingencies
See Note 10 to PSTthe consolidated financial statements for disclosures of the Company’s commitments and adversely affect its results of operations.contingencies.
Seasonality
Our Electronics, WiringControl Devices and Control DevicesElectronics segments are not typically materially affected by seasonality, however the demand for our PST segment consumer products is typically higher in the second half of the year, the fourth quarter in particular.
Inflation and International Presence
Given the current economic climate and recent fluctuations in certain commodity prices, we believe that an increase in such items could significantly affect our profitability. Furthermore, by operating internationally, we are affected by foreign currency exchange rates and the economic conditions of certain countries. See Note 9 to the consolidated financial statements for additional details on the Company’s commodity price and foreign currency exchange rate risks.
Off-balance Sheet Arrangements
At December 31, 2013,2014, wedo not have any off-balance sheet arrangements that have, or are, in the opinion of management, reasonably likely to have, a current or future material effect on our financial condition or results of operations.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period.
On an ongoing basis, we evaluate estimates and assumptions used in our consolidated financial statements. We base our estimates on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from these estimates.
We believe the following are “criticalOur critical accounting policies” –policies, those most important to the financial presentation and those that requireare the most difficult,complex, subjective or complex judgments.require significant judgment, are as follows.
RevenueRecognition and Sales Commitments.We recognize revenues from the sale of products, net of actual and estimated returns of products sold based on historical authorized returns, at the point of passage of title, which is either at the time of shipment or upon customer receipt based on the terms of the sale. We often enter into agreements with our customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is our obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to potential renegotiation from time to time, which may affect product pricing. In certain limited instances, we may be committed under existing agreements to supply products to our customers at selling prices which are not sufficient to cover the direct cost to produce such products. In such situations, we recognize losses immediately. There were no such significant instances of this in 2013, 2012 or 2011. These agreements generally may also be terminated by our customers at any time.
On an ongoing basis, we receive blanket purchase orders from our customers, which include pricing terms. Purchase orders do not always specify quantities. We recognize revenue based on the pricing terms included in our purchase orders as our products are shipped to our customers. In certain instances, we may be asked to provide our customers with annual cost reductions as part of certain agreements. In addition, we have ongoing adjustments to our pricing arrangements with our customers based on the related content, the cost of our products and other commercial factors. Such pricing adjustments are recognized as they are negotiated with our customers.
Warranties.Our warranty liability is established based on our best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet dates. This estimate is based on historical trends of units sold and payment amounts, combined with our current understanding of the status of existing claims. To estimate the warranty liability, we are required to forecast the resolution of existing claims as well as expected future claims on products previously sold. Although we believe that our warranty liability is adequate and that the judgment applied is appropriate, such amounts estimated to be due and payable could differ materially from what will actually transpire in the future. Our customers are increasingly seeking to hold suppliers responsible for product warranties, which could negatively impact our exposure to these costs.
Allowance for Doubtful Accounts. We have concentrations of sales and trade receivable balances with a few key customers. Therefore, it is critical that we evaluate the collectability of accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet their financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. Additionally, we review historical trends for collectability in determining an estimate for our allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. We do not have collateral requirements with our customers.
Contingencies. We are subject to legal proceedings and claims, including product liability claims, commercial or contractual disputes, environmental enforcement actions and other claims that arise in the normal course of business. We routinely assess the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses, by consulting with internal personnel principally involved with such matters and with our outside legal counsel handling such matters.
We have accrued for estimated losses when it is probable that a liability or loss has been incurred and the amount can be reasonably estimated. Contingencies by their nature relate to uncertainties that require the exercise of judgment both in assessing whether or not a liability or loss has been incurred and estimating that amount of probable loss. The liabilities may change in the future due to new developments or changes in circumstances. The inherent uncertainty related to the outcome of these matters can result in amounts materially different from any provisions made with respect to their resolution.
Inventory Valuation.Inventories are valued at the lower of cost or market using the FIFO method for our Electronics Wiring and Control Devices segments and average cost method for our PST segment. Where appropriate, standard cost systems are utilized for purposes of determining cost and the standards are adjusted as necessary to approximate actual costs. Estimates of the lower of cost or market value of inventory are determined based upon current economic conditions, historical sales quantities and patterns and, in some cases, the specific risk of loss on specifically identified inventories.We adjust our excess and obsolescence reserve at least on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. We have guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage.
Goodwill. Goodwill is tested for impairment at least annually on October 1 and whenever events or changes in circumstances provide an indicator of potential impairment. The valuation methodologies employed by the Company use subjective measures including forward looking financial information and discount rates that directly impact the resulting fair values used to test the Company’s reporting units for impairment.
We conducted our annual goodwill impairment test for our majority owned subsidiary, PST Eletrônica Ltda. (“PST”) on October 1, 2013 and did so without a need to expand the impairment test to “step two” of ASC 350 as PST’s calculated fair value exceeded its carrying value by approximately 10% and no indicators of impairment were identified as disclosed in the Company’s 2013 Form 10-K.
During the second quarter of 2014, however, indicators of potential impairment required us to conduct an interim impairment test. Those indicators included a decline in recent operating results and lower growth expectations primarily due to the weakening of the Brazilian economy and automotive market. In accordance with ASC 350, the Company completed “step one” of the impairment analysis and concluded that, as of June 30, 2014, the fair value of the PST reportable segment was below its carrying value, including goodwill. As a result, “step two” of the impairment test was initiated in accordance with ASC 350. Due to its time intensive nature, the “step two” analysis was not completed until the third quarter ended September 30, 2014. In accordance with ASC 350, the Company recorded its best estimate of $29.3 million as a non-cash goodwill impairment charge (of which $6.4 million was attributable to noncontrolling interest) as of June 30, 2014 which was included in the Company’s consolidated statements of operations. Based on the completed “step two” analysis in the third quarter of 2014, the final goodwill impairment as of June 30, 2014 was $23.5 million (of which $5.2 million was attributable to noncontrolling interest). As such, we recorded an adjustment to reduce the goodwill impairment by $5.8 million (of which $1.3 million was attributable to noncontrolling interest) as of September 30, 2014 which was included in our consolidated statements of operations for the three months ended September 30, 2014.
In the fourth quarter of 2014, we conducted our annual goodwill impairment test for PST and completed “step one” of the impairment test concluding that as of October 1, 2014 the fair value of the PST reportable segment was less than its carrying value, including goodwill. PST’s fair value decreased further due to significantly lower sales and earnings growth expectations which were a result of lower forecasted growth in the Brazilian economy and automotive markets and further forecasted decline in foreign currency exchange rates thereby increasing PST’s material costs. Based on the completed “step two” analysis, a goodwill impairment charge of $28.0 million (of which $6.1 million was attributable to noncontrolling interest) was recorded which represented all of the remaining PST goodwill.
The fair value measurement of the reporting unit under the “step one” analysis and the “step two” analysis (a non-recurring fair value measure) in their entirety are classified as Level 3 inputs. The estimates and assumptions underlying the fair value calculations used in our impairment test are uncertain by their nature and can vary significantly from actual results. Factors that management must estimate include, but are not limited to, industry and market conditions, sales volume and pricing, raw material costs, capital expenditures, working capital changes, cost of capital, debt-equity mix and tax rates. The estimates and assumptions that most significantly affect the fair value calculation are sales volume and the associated cash flow assumptions, market growth and weighted average cost of capital. The estimates and assumptions used in the estimate of fair value are consistent with those the Company uses in its internal planning.
The “step two” of the PST goodwill impairment test utilized the following methodologies in determining fair value. Buildings and machinery were valued at an estimated replacement cost for an asset of comparable age and condition. PST finite lived identified intangible assets are customer relationships, tradenames and technology. Customer relationships were valued using an excess earnings method, using various inputs such as the estimated customer attrition rate, future earnings forecast, the amount of contributory asset charges, and a discount rate. Tradenames and technology intangibles are valued using a relief from royalty method, which is based upon comparable market royalty rates for tradenames of similar value. Other working capital items are generally recorded at carrying value, unless there were known conditions that would impact the ultimate settlement amount of a particular item.
Long-Lived and Finite-Lived Assets.We review the carrying value of our long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors that we consider important that could trigger our testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. Although third-party estimates of fair value are utilized when available, theThe estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.
Goodwill. Goodwill is tested for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The valuation methodologies employed by the Company use subjective measures including forward looking financial information and discount rates that directly impact the resulting fair values usedDue to test the Company’s reporting units for impairment. We acquired controlling interest in PST on December 31, 2011 and based on the purchase price in excess of the fair value of net assets acquired goodwill was recorded.
Our annual measurement date to test goodwill for impairment is October 1. At October 1, 2013 and 2012, PST’s calculated fair value exceeded its carrying value, and no indicators of impairment were identified. However, PST’s calculated fair value exceeded its carrying value by approximately 10% at October 1, 2013, which is a decrease from the prior year assessment due to changes in certain key projections and assumptions. Given the smaller margin of excess in 2013, the PST reporting unit is at risk of potentially failing step one of the goodwill impairment test in future periods which may require the recognition of an impairment charge. If we perform step two of the impairment analysis, up to $53.7 million of goodwill assigned to this reporting unit could be at risk for impairment.
At October 1, 2013, PST’s fair value was computed using the income approach (discounted cash flows), which considered the Company’s outlook for current and future market conditions. Within this analysis, the projections reflect management’s best estimate of the future sales mix between product and services and the impact of that sales mix on future margins. If PST does not achieve the forecasts used in the cash flow analysis used in our October 1, 2013 goodwill impairment assessment, it may fail step one of a goodwill impairment test in a future period.
The estimated fair value of our PST reporting unit is closely aligned with the ultimate amount of revenue and operating income that it achieves over the projected period. The discounted cash flows, for goodwill impairment testing purposes, assumed that, through fiscal 2018, this reportable segment would achieve a compounded annual revenue growth rate of approximately 16.0% from its actual fiscal 2013 revenue of $178.5 million. Beyond fiscal 2018, a long-term revenue growth rate of 4.0% was used in the terminal year, and a weighted-average cost of capital (“WACC”) of 19.5% was used to discount the cash flows. Given the current market conditions in Brazil, the moderate long-term growth rate and the WACC were deemed appropriate to use for future cash flow assumptions. Modest changes to these assumptions as well as other key assumptions used in our October 1, 2013 impairment analysis would result in the carrying value of the PST reporting unit exceeding its fair value.goodwill in 2014, we performed an evaluation of PST’s long-lived assets and concluded that there was no impairment resulting from the lower forecasted undiscounted future cash flows.
32 |
During 2014, because our goodwill impairment analysis is sensitive to the ultimate spending decisions by the Brazilian consumer, we will continue to monitor key assumptions and other factors utilized in our October 1, 2013 annual goodwill impairment analysis. If the assumptions and related estimates change in the future, or if the reporting structure is changed or other events and circumstances change, an interim goodwill impairment analysis in advance of our annual October 1 assessment may be required to be performed.
Share-Based Compensation.The estimate for our share-based compensation expense involves a number of assumptions. We believe each assumption used in the valuation is reasonable because it takes into account the experience of the plan and reasonable expectations associated with performance and market based conditions. We estimate volatility and forfeitures based on historical data, future expectations and the expected term of the share-based compensation awards. The assumptions, however, involve inherent uncertainties. As a result, if other assumptions had been used, share-based compensation expense could have varied.
Income Taxes.Deferred income taxes are provided for temporary differences between amounts of assets and liabilities for financial reporting purposes and the basis of such assets and liabilities as measured by tax laws and regulations. Our deferred tax assets include, among other items, net operating loss carryforwards and tax credits that can be used to offset taxable income in future periods and reduce income taxes payable in those future periods. These deferred tax assets begin to expire after December 31, 2025 and 2021, respectively.
Accounting standards requires that deferred tax assets be reduced by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. This assessment requires significant judgment, and in making this evaluation, the Company considers available positive and negative evidence, including the potential to carryback net operating losses and credits, the future reversal of certain taxable temporary differences, actual and forecasted results, and tax planning strategies that are both prudent and feasible. Risk factors include the U.S. economic conditions affecting the U.S. automotive and commercial vehicle markets of which the Company has significant operations.
During the fourth quarter of 2008, the Company concluded that it was no longer more-likely-than-not that we would realize our U.S. deferred tax assets. As a result we provided a full valuation allowance, net of certain future reversing taxable temporary differences, with respect to our U.S. deferred tax assets. ThisWe intend to continue to maintain a full valuation allowance on our deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. However, as a result of the sale of the Wiring business and debt refinancing during the second half of 2014 and anticipated future earnings, we believe that there may be a reasonable possibility that sufficient positive evidence could develop within the next 12 months that may allow us to reach a conclusion has not changed through 2013. To the extent that realization of a portionsome or all of the valuation allowance on our U.S. deferred tax assets becomes more-likely-than-not towill no longer be realized based on changes in circumstances a reversalneeded. Reversal of that portionsome or all of the U.S. valuation allowance would result in the recognition of certain deferred tax assetassets and a decrease to income tax expense for the period the reversal is recorded. However, the exact timing and amount of the valuation allowance will be recorded.release are subject to change on the basis of the level of profitability that we are able to actually achieve.
The Company does not provide deferred income taxes onWe consider the financial reporting basis in excess of tax basis, which includes unremitted earnings, of certain non-U.S. subsidiaries whichto be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for investment in those non-U.S. subsidiaries. Therefore, we have not recorded a deferred tax liability. Specifically with respect to unremitted earnings and the impact of those earnings on the amount of the financial reporting basis in excess of tax basis, if in the future we cannot support that the earnings are deemed permanently reinvested.indefinitely invested outside the United States, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States (see Note 5).
Recently Issued Accounting Standards Not Yet Adopted
In January 2015, the Financial Accounting Standards Board ("FASB") issued accounting standard update (“ASU”) 2015 – 01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)” that eliminates the concept of extraordinary items and their segregation from the results of ordinary operations and expands presentation and disclosure guidance to include items that are both unusual in nature and occur infrequently. The new accounting standard is effective for fiscal years beginning after December 15, 2015. The Company will adopt as of January 1, 2016. The new accounting standard is not expected to have a material impact on our consolidated financial statements or disclosures.
In June 2014, the FASB issued ASU 2014 – 12 “Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” that requires performance targets that could be achieved after the requisite service period be treated as performance conditions that affect the vesting of the award. The new accounting standard is effective for fiscal years beginning after December 15, 2015. The Company will adopt as of January 1, 2016. We do not expect this standard to have an impact on our consolidated financial statements or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied. This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. As such, the Company will adopt this standard in the first quarter of 2017. We are currently evaluating the impact of adopting this standard on its consolidated financial statements.
Recently Adopted Accounting Standards
In FebruaryApril 2014, the FASB issued accounting standard update (“ASU”) No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”, which amends the definition of a discontinued operation in Accounting Standards Codification (“ASC”) 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new standard changes the definition of a discontinued operation and requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. This ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. We adopted this ASU in May 2014 and have applied it prospectively to new disposals and new classifications of disposal groups as held for sale including the Wiring business.
In July 2013, the Financial Accounting Standards Board ("FASB"(“FASB”) issued ASU No. 2013-11, “Income Taxes (Topic 740)”, which requires entities to present in the financial statements an accounting standards update requiring new disclosures about reclassificationsunrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from accumulated other comprehensive lossthe disallowance of a tax position. In such instances, the unrecognized tax benefit is required to net income. These disclosures may be presented on the face of the statements or in the notes to the consolidated financial statements. The standards updatestatements as a liability and not be combined with deferred tax assets. This ASU is effective for fiscal years beginning after December 15, 2012. We2013. This ASU was adopted this standards update on January 1, 2013 and revised our disclosures, see Note 2 to2014 which did not have a material impact on our consolidated financial statements.
In December 2011, the FASB issued an accounting standards update requiring new disclosures about financial instruments and derivative instruments that are either offset by or subject to an enforceable master netting arrangement or similar agreement. The standards update is effective for fiscal years beginning after December 15, 2012. We adopted this standards update on January 1, 2013 which had no impact on our disclosures.
Forward-Looking Statements
Portions of this report on Form 10-K contain “forward-looking statements” under the Private Securities Litigation Reform Act of 1995. These statements appear in a number of places in this report and include statements regarding the intent, belief or current expectations of the Company, with respect to, among other things, our (i) future product and facility expansion, (ii) acquisition strategy, (iii) investments and new product development, (iv) growth opportunities related to awarded business and (v) operation expectations. Forward-looking statements may be identified by the words “will,” “may,” “should,” “designed to,” “believes,” “plans,” “projects,” “intends,” “expects,” “estimates,” “anticipates,” “continue,” and similar words and expressions. The forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among other factors:
· | the reduced purchases, loss or bankruptcy of a major customer; |
· | the costs and timing of facility closures, business realignment, or similar actions; |
· | a significant change in automotive, commercial, |
· | competitive market conditions and resulting effects on sales and pricing; |
· | the impact on changes in foreign currency exchange rates on sales, costs and results, particularly the Brazilian real, euro, Argentinian peso, Mexican peso and |
· | our ability to achieve cost reductions that offset or exceed customer-mandated selling price reductions; |
· | a significant change in general economic conditions in any of the various countries in which we operate; |
· | labor disruptions at our facilities or at any of our significant customers or suppliers; |
· | the ability of our suppliers to supply us with parts and components at competitive prices on a timely basis; |
· | the amount of our indebtedness and the restrictive covenants contained in the agreements governing our indebtedness, including our Credit |
· | customer acceptance of new products; |
· | capital availability or costs, including changes in interest rates or market perceptions; |
· | the failure to achieve the successful integration of any acquired company or business; and |
· | the items described in Part I, Item IA (“Risk Factors”). |
In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate RiskRates
From time to time, weWe are exposed to certain market risks,interest rate risk primarily resulting from the effects of changes in interest rates. The face amountAt December 31, 2014, approximately 76.7% of our senior secured notesoutstanding debt was $175.0 million atfloating-rate and 23.3% was fixed-rate. We estimate that a 1.0% change in the interest costs of our floating-rate debt outstanding as of December 31, 2013. 2014 would change interest expense on an annual basis by approximately $1.0 million.
Currency Exchange Rates
In addition to the United States, we have significant operations in Europe, South America and Mexico. As a result we are subject to translation risk because our foreign operations are in local currency (particularly the Brazilian real, Mexican peso, euro and Swedish krona) must be translated into U.S. dollars. As currency exchange rates fluctuate, the translation of our consolidated statements of operations into U.S. dollars affects the comparability of revenues, expenses, operating income, net income and earnings (loss) per share between years.
We currently have no borrowings outstandinguse derivative financial instruments, including foreign currency forward contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on our asset-based Credit Facility at December 31, 2013. foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures.
As discussed in detail in Note 9 to our consolidated financial statements, we have entered into a fixed-to-floating interest rate swap agreement (the “Swap”) with a notional amountforeign currency forward contracts the purpose of $45.0 millionwhich is to hedge ourreduce exposure related to the Company’s euro-denominated receivables as well as to reduce exposure to future Mexican peso-denominated purchases and U.S. dollar purchases by our non-U.S. dollar functional currency European business units. These foreign currency contracts expire throughout 2015. We estimate that a 10.0% unidirectional change in currency exchange rates would result in a change in fair value fluctuations on a portion of our senior secured notes. The Swap was designated as aat December 31, 2014 by approximately $3.0 million. It is important to note that the change in fair value hedge of the fixed interest rate obligation under our $175.0 million 9.5% senior secured notes due October 15, 2017. Underforeign currency forward contacts would be partially offset by changes in the Swap, we payunderlying exposures being hedged.
We estimate that a variable interest rate equal10.0% unidirectional change in currency exchange rates relative to the six-month London Interbank Offered Rate (“LIBOR”) plus 7.19% and we receive a fixed interest rate of 9.5%. The Swap requires semi-annual settlements on April 15 and October 15, which began on April 15, 2011. The critical terms ofU.S dollar would have changed our pre-tax income for the Swap are aligned with the terms of the senior secured notes, including maturity of October 15, 2017, resulting in no hedge ineffectiveness. A hypothetical 10.0% favorable or adverse change in the LIBOR would not significantly affect our results of operations, financial position or cash flows.year ended December 31, 2014 by approximately $7.5 million.
Commodity Price Risk
Given the current economic climate and recent fluctuationsThe competitive marketplace in certain commoditywhich we operate may limit our ability to recover increased costs through higher prices. As such, we currently are experiencing an increasedsubject to market risk particularly with respect to thecommodity price fluctuations principally related to our purchases of purchase of copper, zinc, resins and certain other commodities. In the past, we managed this riskcommodities through a combination of fixed price agreements, staggered short-term contract maturities and commercial negotiations with our suppliers and customers. In the future, if we believe that the terms of a fixed price agreement become beneficial to us, we will enter into another such instrument. We have sought to alleviate the effect of increasing commodity costs by including a material pass-through provision in our customer contracts whenever possible. We may also consider pursuing alternative commodities or alternative suppliers to mitigate this risk over a period of time. The recent volatility in certain commodity costs has negatively affected our operating results.
At December 31, 2013 we have several fixed price commodity contracts totaling 1.6 million pounds of copper. These contracts settle from January 2014 to December 2014. The purpose of these contracts is to reduce our price risk as it relates to copper prices. We estimate that a hypothetical pre-tax gain (loss) in fair value from a 10.0% favorable or adverse change in the fair value of commodity prices would be approximately $0.4 million and $(0.6) million, respectively.
Foreign Currency Exchange Risk
We use derivative financial instruments, including foreign currency forward contracts, to mitigate our exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions and other foreign currency exposures. As discussed in Note 9 to our consolidated financial statements, we have entered into foreign currency forward contracts that had a notional value of $58.3 million as of December 31, 2013. The purpose of these foreign currency contracts is to reduce exposure related to the Company’s euro-denominated receivables as well as to reduce exposure to future Mexican peso-denominated purchases. The estimated fair value of these contracts at December 31, 2013, per quoted market sources, was a liability of approximately $0.3 million. These foreign currency contracts expire during 2014. We do not expect the effects of this risk to be material in the future based on the current operating and economic conditions in the countries in which we operate.
A hypothetical pre-tax gain (loss) in fair value from a 10.0% favorable or adverse change in quoted currency exchange rates would be approximately $1.2 million or $(1.5) million for our euro-denominated receivables, as of December 31, 2013. A hypothetical pre-tax gain (loss) in fair value from 10.0% favorable or adverse change in quoted currency exchange rates would be approximately $4.1 million or $(5.0) million for the Company’s Mexican peso-denominated payables as of December 31, 2013. It is important to note that gains and losses indicated in the sensitivity analysis would generally be offset by gains and losses on the underlying exposures being hedged. Therefore, a hypothetical pre-tax gain or loss in fair value from a 10.0% favorable or adverse change in quoted foreign currencies would not significantly affect our results of operations, financial position or cash flows.
We have significant operations in foreign locations. As a result we are subject to the risk of price fluctuations due to the effects of exchange rates on net sales, operating costs, assets and liabilities denominated in currencies other than the U.S. dollar, particularly the Mexican peso, euro, Swedish krona, British pound and Brazilian real. We estimate that a hypothetical 10.0% favorable or adverse change of the U.S. dollar relative to other currencies in 2013 would have a pre-tax translation favorable (unfavorable) effect of $4.6 million or $(4.3) million as of December 31, 2013.
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
36 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Stoneridge, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Stoneridge, Inc. and Subsidiaries as of December 31, 20132014 and 2012,2013, and the related consolidated statements of operations, comprehensive income (loss), cash flows and shareholders’shareholders' equity for each of the three years in the period ended December 31, 2013.2014. Our audits also included the financial statement schedule included in Item 15(a)(2). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Stoneridge, Inc. and Subsidiaries at December 31, 20132014 and 2012,2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Stoneridge, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2013,2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework)(2013 framework) and our report dated March 7, 201413, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 13, 2015
As of December 31 (in thousands) | 2013 | 2012 | 2014 | 2013 | ||||||||||||
ASSETS | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 62,825 | $ | 44,555 | $ | 43,021 | $ | 62,825 | ||||||||
Accounts receivable, less reserves of $3,514 and $3,394, respectively | 133,736 | 141,503 | ||||||||||||||
Accounts receivable, less reserves of $2,017 and $2,625, respectively | 105,102 | 102,449 | ||||||||||||||
Inventories, net | 114,058 | 96,032 | 71,253 | 79,528 | ||||||||||||
Prepaid expenses and other current assets | 29,617 | 28,964 | 26,135 | 27,831 | ||||||||||||
Current assets of discontinued operations | - | 96,969 | ||||||||||||||
Total current assets | 340,236 | 311,054 | 245,511 | 369,602 | ||||||||||||
Long-term assets: | ||||||||||||||||
Property, plant and equipment, net | 110,872 | 119,147 | 85,311 | 86,323 | ||||||||||||
Other assets: | ||||||||||||||||
Intangible assets, net | 68,842 | 84,397 | 56,637 | 68,498 | ||||||||||||
Goodwill | 58,521 | 66,381 | 1,078 | 54,348 | ||||||||||||
Investments and other long-term assets, net | 9,851 | 11,712 | 10,214 | 9,551 | ||||||||||||
Total long-term assets | 248,086 | 281,637 | 153,240 | 218,720 | ||||||||||||
Total assets | $ | 588,322 | $ | 592,691 | $ | 398,751 | $ | 588,322 | ||||||||
LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Current portion of debt | $ | 12,187 | $ | 18,925 | $ | 19,655 | $ | 12,187 | ||||||||
Revolving credit facilities | - | 1,160 | ||||||||||||||
Accounts payable | 84,884 | 76,303 | 58,593 | 57,471 | ||||||||||||
Accrued expenses and other current liabilities | 56,651 | 57,081 | 42,066 | 47,310 | ||||||||||||
Current liabilities of discontinued operations | - | 36,754 | ||||||||||||||
Total current liabilities | 153,722 | 153,469 | 120,314 | 153,722 | ||||||||||||
Long-term liabilities: | ||||||||||||||||
Revolving credit facility | 100,000 | - | ||||||||||||||
Long-term debt, net | 185,045 | 181,311 | 10,651 | 185,045 | ||||||||||||
Deferred income taxes | 57,026 | 59,819 | 50,006 | 57,026 | ||||||||||||
Other long-term liabilities | 3,995 | 4,258 | 3,974 | 3,995 | ||||||||||||
Total long-term liabilities | 246,066 | 245,388 | 164,631 | 246,066 | ||||||||||||
Shareholders' equity: | ||||||||||||||||
Preferred Shares, without par value, authorized 5,000 shares, none issued | - | - | ||||||||||||||
Common Shares, without par value, authorized 60,000 shares, issued 28,803 and 28,433 shares and outstanding 28,483 and 27,913 shares at December 31, 2013 and 2012, respectively, with no stated value | - | - | ||||||||||||||
Preferred Shares, without par value, 5,000 shares authorized, none issued | - | - | ||||||||||||||
Common Shares, without par value, 60,000 shares authorized, 28,853 and 28,803 shares issued and 28,221 and 28,483 shares outstanding at December 31, 2014 and 2013, respectively, with no stated value | - | - | ||||||||||||||
Additional paid-in capital | 187,742 | 184,822 | 192,892 | 187,742 | ||||||||||||
Common Shares held in treasury, 320 and 520 shares at December 31, 2013 and 2012, respectively, at cost | (519 | ) | (1,885 | ) | ||||||||||||
Common Shares held in treasury, 632 and 320 shares at December 31, 2014 and 2013, respectively, at cost | (1,284 | ) | (519 | ) | ||||||||||||
Accumulated deficit | (7,771 | ) | (22,902 | ) | (54,879 | ) | (7,771 | ) | ||||||||
Accumulated other comprehensive loss | (30,458 | ) | (10,282 | ) | (45,473 | ) | (30,458 | ) | ||||||||
Total Stoneridge Inc. shareholders' equity | 148,994 | 149,753 | 91,256 | 148,994 | ||||||||||||
Noncontrolling interest | 39,540 | 44,081 | 22,550 | 39,540 | ||||||||||||
Total shareholders' equity | 188,534 | 193,834 | 113,806 | 188,534 | ||||||||||||
Total liabilities and shareholders' equity | $ | 588,322 | $ | 592,691 | $ | 398,751 | $ | 588,322 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31 (in thousands, except per share data) | 2013 | 2012 | 2011 | |||||||||||||||||||||
Years ended December 31, (in thousands, except per share data) | 2014 | 2013 | 2012 | |||||||||||||||||||||
Net sales | $ | 947,830 | $ | 938,513 | $ | 765,373 | $ | 660,579 | $ | 659,486 | $ | 612,466 | ||||||||||||
Costs and expenses: | ||||||||||||||||||||||||
Cost of goods sold | 721,809 | 713,869 | 618,596 | 469,705 | 453,531 | 427,199 | ||||||||||||||||||
Selling, general and administrative | 186,317 | 195,915 | 128,306 | 123,630 | 123,180 | 126,417 | ||||||||||||||||||
Goodwill impairment charge | - | - | 4,945 | |||||||||||||||||||||
Design and development | 41,609 | 40,372 | 38,945 | |||||||||||||||||||||
Goodwill impairment | 51,458 | - | - | |||||||||||||||||||||
Operating income | 39,704 | 28,729 | 13,526 | |||||||||||||||||||||
Operating income (loss) | (25,823 | ) | 42,403 | 19,905 | ||||||||||||||||||||
Interest expense, net | 18,346 | 20,033 | 17,234 | 16,880 | 18,096 | 19,869 | ||||||||||||||||||
Equity in earnings of investees | (476 | ) | (760 | ) | (10,034 | ) | ||||||||||||||||||
Gain on previously held equity interest | - | - | (65,372 | ) | ||||||||||||||||||||
Equity in earnings of investee | (815 | ) | (476 | ) | (760 | ) | ||||||||||||||||||
Loss on early extinguishment of debt | 10,607 | - | - | |||||||||||||||||||||
Other expense, net | 1,100 | 4,896 | 56 | 565 | 1,457 | 4,606 | ||||||||||||||||||
Income before income taxes | 20,734 | 4,560 | 71,642 | |||||||||||||||||||||
Income (loss) before income taxes from continuing operations | (53,060 | ) | 23,326 | (3,810 | ) | |||||||||||||||||||
Provision for income taxes | 4,226 | 812 | 26,105 | |||||||||||||||||||||
Provision (benefit) for income taxes from continuing operations | (1,856 | ) | 2,797 | (33 | ) | |||||||||||||||||||
Net income | 16,508 | 3,748 | 45,537 | |||||||||||||||||||||
Income (loss) from continuing operations | (51,204 | ) | 20,529 | (3,777 | ) | |||||||||||||||||||
Discontinued operations: | ||||||||||||||||||||||||
Income (loss) from discontinued operations, net of tax | (811 | ) | (4,021 | ) | 7,525 | |||||||||||||||||||
Loss on disposal, net of tax | (8,576 | ) | - | - | ||||||||||||||||||||
Income (loss) from discontinued operations | (9,387 | ) | (4,021 | ) | 7,525 | |||||||||||||||||||
Net income (loss) | (60,591 | ) | 16,508 | 3,748 | ||||||||||||||||||||
Net income (loss) attributable to noncontrolling interest | 1,377 | (1,613 | ) | (3,820 | ) | (13,483 | ) | 1,377 | (1,613 | ) | ||||||||||||||
Net income attributable to Stoneridge, Inc. | $ | 15,131 | $ | 5,361 | $ | 49,357 | ||||||||||||||||||
Net income (loss) attributable to Stoneridge, Inc. | $ | (47,108 | ) | $ | 15,131 | $ | 5,361 | |||||||||||||||||
Earnings per share attributable to Stoneridge, Inc.: | ||||||||||||||||||||||||
Earnings (loss) per share from continuing operations attributable to Stoneridge, Inc.: | ||||||||||||||||||||||||
Basic | $ | (1.40 | ) | $ | 0.72 | $ | (0.08 | ) | ||||||||||||||||
Diluted | $ | (1.40 | ) | $ | 0.70 | $ | (0.08 | ) | ||||||||||||||||
Earnings (loss) per share attributable to discontinued operations: | ||||||||||||||||||||||||
Basic | $ | (0.35 | ) | $ | (0.15 | ) | $ | 0.28 | ||||||||||||||||
Diluted | $ | (0.35 | ) | $ | (0.14 | ) | $ | 0.28 | ||||||||||||||||
Earnings (loss) per share attributable to Stoneridge, Inc.: | ||||||||||||||||||||||||
Basic | $ | 0.57 | $ | 0.20 | $ | 2.04 | $ | (1.75 | ) | $ | 0.57 | $ | 0.20 | |||||||||||
Diluted | $ | 0.56 | $ | 0.20 | $ | 2.00 | $ | (1.75 | ) | $ | 0.56 | $ | 0.20 | |||||||||||
Weighted-average shares outstanding: | ||||||||||||||||||||||||
Basic | 26,671 | 26,377 | 24,181 | 26,924 | 26,671 | 26,377 | ||||||||||||||||||
Diluted | 27,193 | 27,032 | 24,645 | 26,924 | 27,193 | 26,377 |
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31 (in thousands) | 2013 | 2012 | 2011 | |||||||||
Net income | $ | 16,508 | $ | 3,748 | $ | 45,537 | ||||||
Other comprehensive loss, net of tax: | ||||||||||||
Foreign currency translation adjustments | (17,925 | ) | (10,502 | ) | (5,971 | ) | ||||||
Benefit plan liability adjustments | - | (27 | ) | - | ||||||||
Unrealized gain on marketable securities | - | - | 16 | |||||||||
Unrealized gain (loss) on derivatives | (2,251 | ) | 9,862 | (7,722 | ) | |||||||
Other comprehensive loss, net of tax | (20,176 | ) | (667 | ) | (13,677 | ) | ||||||
Consolidated comprehensive income (loss) | (3,668 | ) | 3,081 | 31,860 | ||||||||
Income (loss) attributable to noncontrolling interest | 1,377 | (1,613 | ) | (3,820 | ) | |||||||
Comprehensive income (loss) attributable to Stoneridge, Inc. | $ | (5,045 | ) | $ | 4,694 | $ | 35,680 |
Years ended December 31 (in thousands) | 2014 | 2013 | 2012 | |||||||||
Net income (loss) | $ | (60,591 | ) | $ | 16,508 | $ | 3,748 | |||||
Less: Income (loss) attributable to noncontrolling interest | (13,483 | ) | 1,377 | (1,613 | ) | |||||||
Net income (loss) attributable to Stoneridge, Inc. | (47,108 | ) | 15,131 | 5,361 | ||||||||
Other comprehensive income (loss), net of tax attributable to Stoneridge, Inc.: | ||||||||||||
Foreign currency translation | (15,268 | ) | (17,925 | ) | (10,502 | ) | ||||||
Benefit plan liability | 141 | - | (27 | ) | ||||||||
Unrealized gain (loss) on derivatives | 112 | (2,251 | ) | 9,862 | ||||||||
Other comprehensive loss, net of tax attributable to Stoneridge, Inc. | (15,015 | ) | (20,176 | ) | (667 | ) | ||||||
Comprehensive income (loss) attributable to Stoneridge, Inc. | $ | (62,123 | ) | $ | (5,045 | ) | $ | 4,694 |
The Company has combined comprehensive income (loss) from continuing operations and comprehensive loss from discontinued operations herein.
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands) | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
OPERATING ACTIVITIES: | ||||||||||||||||||||||||
Net income | $ | 16,508 | $ | 3,748 | $ | 45,537 | ||||||||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||||||||||
Net income (loss) | $ | (60,591 | ) | $ | 16,508 | $ | 3,748 | |||||||||||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||||||||||||||
Depreciation | 28,989 | 28,519 | 18,847 | 24,372 | 28,989 | 28,519 | ||||||||||||||||||
Amortization, including accretion of debt discount | 6,236 | 6,802 | 1,113 | 5,709 | 6,236 | 6,802 | ||||||||||||||||||
Deferred income taxes | (3,081 | ) | (2,733 | ) | 23,938 | (3,238 | ) | (3,081 | ) | (2,733 | ) | |||||||||||||
Earnings of equity method investees | (476 | ) | (760 | ) | (10,034 | ) | ||||||||||||||||||
Earnings of equity method investee | (815 | ) | (476 | ) | (760 | ) | ||||||||||||||||||
Loss (gain) on sale of fixed assets | 189 | (268 | ) | (88 | ) | 110 | 189 | (268 | ) | |||||||||||||||
Share-based compensation expense | 4,974 | 4,890 | 4,423 | 5,406 | 4,974 | 4,890 | ||||||||||||||||||
Asset impairments | - | - | 807 | |||||||||||||||||||||
Goodwill impairment | - | - | 4,945 | 51,458 | - | - | ||||||||||||||||||
Gain on previously held equity interest | - | - | (65,372 | ) | ||||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||
Loss on disposal of Wiring business, net of tax | 8,576 | - | - | |||||||||||||||||||||
Loss on early extinguishment of debt | 10,607 | - | - | |||||||||||||||||||||
Changes in operating assets and liabilities, net of effect of business acquisition: | ||||||||||||||||||||||||
Accounts receivable, net | 4,122 | 19,466 | (11,658 | ) | (19,400 | ) | 4,122 | 19,466 | ||||||||||||||||
Inventories, net | (23,646 | ) | 20,995 | (9,895 | ) | 3,161 | (23,646 | ) | 20,995 | |||||||||||||||
Prepaid expenses and other | (2,585 | ) | 1,772 | (4,783 | ) | (1,306 | ) | (2,585 | ) | 1,772 | ||||||||||||||
Accounts payable | 9,485 | (7,282 | ) | (23,879 | ) | 524 | 9,485 | (7,282 | ) | |||||||||||||||
Accrued expenses and other | 2,969 | 396 | 27,020 | (4,758 | ) | 2,969 | 396 | |||||||||||||||||
Net cash provided by operating activities | 43,684 | 75,545 | 921 | 19,815 | 43,684 | 75,545 | ||||||||||||||||||
INVESTING ACTIVITIES: | ||||||||||||||||||||||||
Capital expenditures | (25,344 | ) | (26,352 | ) | (26,290 | ) | (24,754 | ) | (25,344 | ) | (26,352 | ) | ||||||||||||
Proceeds from sale of fixed assets | 107 | 521 | 3,863 | 110 | 107 | 521 | ||||||||||||||||||
Capital contribution from noncontrolling interest | - | - | 397 | |||||||||||||||||||||
Payment for additional interest in PST | - | (19,779 | ) | (7,753 | ) | |||||||||||||||||||
Net cash used for investing activities | (25,237 | ) | (45,610 | ) | (29,783 | ) | ||||||||||||||||||
Proceeds from sale of Wiring business | 71,386 | - | - | |||||||||||||||||||||
Business acquisitions | (1,022 | ) | - | (19,779 | ) | |||||||||||||||||||
Net cash provided by (used for) investing activities | 45,720 | (25,237 | ) | (45,610 | ) | |||||||||||||||||||
FINANCING ACTIVITIES: | ||||||||||||||||||||||||
Revolving credit facility borrowings | - | 21,579 | 38,993 | 100,000 | - | 21,579 | ||||||||||||||||||
Revolving credit facility payments | (1,160 | ) | (59,600 | ) | (554 | ) | - | (1,160 | ) | (59,600 | ) | |||||||||||||
Extinguishment of senior notes | (175,000 | ) | - | - | ||||||||||||||||||||
Premium related to early extinguishment of senior notes | (8,006 | ) | - | - | ||||||||||||||||||||
Proceeds from issuance of other debt | 25,555 | 22,146 | 1,408 | 30,072 | 25,555 | 22,146 | ||||||||||||||||||
Repayments of other debt | (24,382 | ) | (48,327 | ) | (968 | ) | (25,610 | ) | (24,382 | ) | (48,327 | ) | ||||||||||||
Noncontrolling interest shareholder distribution | (1,083 | ) | - | - | ||||||||||||||||||||
Other financing costs | - | - | (605 | ) | (1,666 | ) | - | - | ||||||||||||||||
Repurchase of Common Shares to satisfy employee tax withholding | (516 | ) | (1,273 | ) | (752 | ) | (765 | ) | (516 | ) | (1,273 | ) | ||||||||||||
Net cash provided by (used for) financing activities | (503 | ) | (65,475 | ) | 37,522 | |||||||||||||||||||
Net cash used for financing activities | (82,058 | ) | (503 | ) | (65,475 | ) | ||||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 326 | 1,364 | (1,903 | ) | (3,281 | ) | 326 | 1,364 | ||||||||||||||||
Net change in cash and cash equivalents | 18,270 | (34,176 | ) | 6,757 | (19,804 | ) | 18,270 | (34,176 | ) | |||||||||||||||
Cash and cash equivalents at beginning of period | 44,555 | 78,731 | 71,974 | 62,825 | 44,555 | 78,731 | ||||||||||||||||||
Cash and cash equivalents at end of period | $ | 62,825 | $ | 44,555 | $ | 78,731 | $ | 43,021 | $ | 62,825 | $ | 44,555 | ||||||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||||||||||||
Cash paid for interest | $ | 18,634 | $ | 20,317 | $ | 17,494 | $ | 20,464 | $ | 18,634 | $ | 20,317 | ||||||||||||
Cash paid for income taxes, net | $ | 6,426 | $ | 4,345 | $ | 1,365 | $ | 3,054 | $ | 6,426 | $ | 4,345 | ||||||||||||
Supplemental disclosure of non-cash financing activities: | ||||||||||||||||||||||||
Supplemental disclosure of non-cash operating and financing activities: | ||||||||||||||||||||||||
Change in fair value of interest rate swap | $ | (1,419 | ) | $ | 1,134 | $ | 4,095 | $ | (793 | ) | $ | (1,419 | ) | $ | 1,134 | |||||||||
Bank payment of vendor payables under short-term debt obligations | $ | 4,758 | $ | - | $ | - | ||||||||||||||||||
Issuance of Common Shares for acquisition of additional PST interest | $ | - | $ | 10,197 | $ | 5,113 | $ | - | $ | - | $ | 10,197 |
The Company has combined cash flows from continuing operations and cash flows from discontinued operations within the operating, investing and financing categories.
The accompanying notes are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands) | Number of Common Shares outstanding | Number of treasury shares | Additional paid-in capital | Common Shares held in treasury | Accumulated deficit | Accumulated other comprehensive income (loss) | Noncontrolling interest | Total shareholders' equity | Number of Common Shares outstanding | Number of treasury shares | Additional paid-in capital | Common Shares held in treasury | Accumulated deficit | Accumulated other comprehensive income (loss) | Noncontrolling interest | Total shareholders' equity | ||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2011 | 25,393 | 601 | $ | 161,587 | $ | (1,118 | ) | $ | (77,620 | ) | $ | 4,062 | $ | 4,308 | $ | 91,219 | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | 49,357 | - | (3,820 | ) | 45,537 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on marketable securities | - | - | - | - | - | 16 | - | 16 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives | - | - | - | - | - | (7,722 | ) | - | (7,722 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | - | - | - | - | - | (5,971 | ) | - | (5,971 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business acquisition | 647 | - | 5,113 | 48,727 | 53,840 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Capital contribution from noncontrolling interest | - | - | - | - | - | - | 397 | 397 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of share options | 19 | - | 194 | - | - | - | - | 194 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted Common Shares | 437 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forfeited restricted Common Shares | (223 | ) | 223 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchased Common Shares for treasury | (51 | ) | 51 | - | (752 | ) | - | - | - | (752 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation matters | - | - | 3,881 | - | - | - | - | 3,881 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2011 | 26,222 | 875 | 170,775 | (1,870 | ) | (28,263 | ) | (9,615 | ) | 49,612 | 180,639 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, JANUARY 1, 2012 | 26,222 | 875 | $ | 170,775 | $ | (1,870 | ) | $ | (28,263 | ) | $ | (9,615 | ) | $ | 49,612 | $ | 180,639 | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | 5,361 | - | (1,613 | ) | 3,748 | - | - | - | - | 5,361 | - | (1,613 | ) | 3,748 | ||||||||||||||||||||||||||||||||||||||||||||||
Benefit plan liability adjustments | - | - | - | - | - | (27 | ) | - | (27 | ) | - | - | - | - | - | (27 | ) | - | (27 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives | - | - | - | - | - | 9,862 | - | 9,862 | - | - | - | - | - | 9,862 | - | 9,862 | ||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | - | - | - | - | - | (10,502 | ) | (3,918 | ) | (14,420 | ) | - | - | - | - | - | (10,502 | ) | (3,918 | ) | (14,420 | ) | ||||||||||||||||||||||||||||||||||||||||||
Business acquisition | 1,294 | - | 10,197 | - | - | - | - | 10,197 | 1,294 | - | 10,197 | - | - | - | - | 10,197 | ||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted Common Shares | 653 | (611 | ) | (1,258 | ) | 1,258 | - | - | - | - | 653 | (611 | ) | (1,258 | ) | 1,258 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Forfeited restricted Common Shares | (142 | ) | 142 | - | - | - | - | - | - | (142 | ) | 142 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchased Common Shares for treasury | (114 | ) | 114 | - | (1,273 | ) | - | - | - | (1,273 | ) | (114 | ) | 114 | - | (1,273 | ) | - | - | - | (1,273 | ) | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation matters | - | - | 5,108 | - | - | - | - | 5,108 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | 5,108 | - | - | - | - | 5,108 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2012 | 27,913 | 520 | 184,822 | (1,885 | ) | (22,902 | ) | (10,282 | ) | 44,081 | 193,834 | 27,913 | 520 | 184,822 | (1,885 | ) | (22,902 | ) | (10,282 | ) | 44,081 | 193,834 | ||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | 15,131 | - | 1,377 | 16,508 | - | - | - | - | 15,131 | - | 1,377 | 16,508 | ||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized loss on derivatives | - | - | - | - | - | (2,251 | ) | - | (2,251 | ) | - | - | - | - | - | (2,251 | ) | - | (2,251 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | - | - | - | - | - | (17,925 | ) | (5,706 | ) | (23,631 | ) | - | - | - | - | - | (17,925 | ) | (5,706 | ) | (23,631 | ) | ||||||||||||||||||||||||||||||||||||||||||
PST dividends | - | - | - | - | - | - | (212 | ) | (212 | ) | - | - | - | - | - | - | (212 | ) | (212 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted Common Shares | 883 | (513 | ) | (1,882 | ) | 1,882 | - | - | - | - | 883 | (513 | ) | (1,882 | ) | 1,882 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Forfeited restricted Common Shares | (233 | ) | 233 | - | - | - | - | - | - | (233 | ) | 233 | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchased Common Shares for treasury | (80 | ) | 80 | - | (516 | ) | - | - | - | (516 | ) | (80 | ) | 80 | - | (516 | ) | - | - | - | (516 | ) | ||||||||||||||||||||||||||||||||||||||||||
Share-based compensation matters | - | - | 4,802 | - | - | - | - | 4,802 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | 4,802 | - | - | - | - | 4,802 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2013 | 28,483 | 320 | $ | 187,742 | $ | (519 | ) | $ | (7,771 | ) | $ | (30,458 | ) | $ | 39,540 | $ | 188,534 | 28,483 | 320 | 187,742 | (519 | ) | (7,771 | ) | (30,458 | ) | 39,540 | 188,534 | ||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | (47,108 | ) | - | (13,483 | ) | (60,591 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Benefit plan liability adjustments | - | - | - | - | - | 141 | - | 141 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Unrealized gain on derivatives | - | - | - | - | - | 112 | - | 112 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments | - | - | - | - | - | (15,268 | ) | (3,507 | ) | (18,775 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted Common Shares | 50 | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Forfeited restricted Common Shares | (238 | ) | 238 | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repurchased Common Shares for treasury | (74 | ) | 74 | - | (765 | ) | - | - | - | (765 | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | 5,150 | - | - | - | - | 5,150 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BALANCE, DECEMBER 31, 2014 | 28,221 | 632 | $ | 192,892 | $ | (1,284 | ) | $ | (54,879 | ) | $ | (45,473 | ) | $ | 22,550 | $ | 113,806 |
The accompanying notes are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
1. Organization and Nature of Business
Stoneridge, Inc. and its subsidiaries are global designers and manufacturers of highly engineered electrical and electronic components, modules and systems for the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Stoneridge, Inc. and its wholly-owned and majority-owned subsidiaries (collectively, the “Company”). Intercompany transactions and balances have been eliminated in consolidation. The Company analyzes its ownership interests in accordance with Accounting Standards Codification “ASC”(“ASC”) Topic 810 (Consolidations) to determine whether they are VIE’s and, if so, whether the Company is the primary beneficiary.
The Company’s investment in Minda Stoneridge Instruments Ltd. (“Minda”) at December 31, 2014, 2013 2012 and 20112012 was determined under the provisions of ASC Topic 810 to be an unconsolidated entity and was accounted for under the equity method of accounting based on our 49% noncontrolling interest.
On December 31, 2011, the Company completed the acquisition of an additional 24% controlling interest in PST Eletrônica Ltda. (“PST”). As a result, the Company owns increasing its ownership to 74% of the outstanding equity of PST.
PST’s As a result, PST became a consolidated subsidiary and its results for the years ended December 31, 2013 and 2012 were consolidated such that 100% of PST’s operations were included in each line from net sales through net income in the Company’s consolidated statements of operations, with the 26% noncontrolling interest reduced (increased) in the netcomprehensive income (loss) attributable to noncontrolling interest line.
PST’s resultsand cash flows for the yearyears ended December 31, 2011 were accounted2014, 2013 and 2012.
During the second quarter of 2014, the Company entered into an asset purchase agreement to divest its Wiring business including substantially all of its assets and liabilities. The sale was completed on August 1, 2014. The Wiring business has been classified as discontinued operations for as an unconsolidated joint venture under the equity method of accounting such that our 50% portion of PST’s after-tax earnings were included within equity in earnings of investeesall periods presented in the consolidated statements offinancial statements. Accordingly, the Wiring business is excluded from both continuing operations as a controlling interest in PST was not acquired untiland segment results for all periods presented. All previously reported financial information has been revised to conform to the close ofcurrent presentation. The Wiring business on December 31, 2011.designed and manufactured wiring harness products and assembled instruments panels for sale principally to the commercial, agricultural and off-highway vehicle markets.
Accounting Estimates
The preparation of financial statements in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, including certain self-insured risks and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Because actual results could differ from those estimates, the Company revises its estimates and assumptions as new information becomes available.
Cash and Cash Equivalents
The Company’s cash and cash equivalents are actively traded money market funds with short-term investments in marketable securities, primarily U.S. government securities. Cash and cash equivalents are stated at cost, which approximates fair value, due to the highly liquid nature and short-term duration of the underlying securities.
Accounts Receivable and Concentration of Credit Risk
Revenues are principally generated from the automotive, commercial, automotive,motorcycle, off-highway and agricultural motorcycle and off-highway vehicle markets. The Company’s largest customers were Deere &Ford Motor Company (“Deere”) and Navistar International Corporation (“Navistar”),Scania Group, primarily related to the WiringControl Devices and Electronics reportable segment,segments, respectively, and accounted for the following percentages of consolidated net sales for the years ended December 31, 2014, 2013 2012 and 2011:2012:
2013 | 2012 | 2011 | ||||||||||
Deere | 14 | % | 13 | % | 15 | % | ||||||
Navistar | 13 | % | 18 | % | 24 | % |
2014 | 2013 | 2012 | ||||||||||
Ford Motor Company | 11 | % | 10 | % | 8 | % | ||||||
Scania Group | 8 | % | 8 | % | 6 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Accounts receivable are recorded at the invoice price, net of an estimate of allowance for doubtful accounts and other reserves.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Allowance for Doubtful Accounts
The Company evaluates the collectability of accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, a specific allowance for doubtful accounts is recorded against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. Additionally, the Company reviews historical trends for collectability in determining an estimate for its allowance for doubtful accounts. If economic circumstances change substantially, estimates of the recoverability of amounts due to the Company could be reduced by a material amount. The Company does not have collateral requirements with its customers.
Inventories
Inventories are valued at the lower of cost (using either the first-in, first-out (“FIFO”) or average cost methods) or market. The Company evaluates and adjusts as necessary its excess and obsolescence reserve on a quarterly basis. Excess inventories are quantities of items that exceed anticipated sales or usage for a reasonable period. The Company has guidelines for calculating provisions for excess inventories based on the number of months of inventories on hand compared to anticipated sales or usage. Management uses its judgment to forecast sales or usage and to determine what constitutes a reasonable period. Inventory cost includes material, labor and overhead. Inventories consist of the following:
As of December 31 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Raw materials | $ | 71,631 | $ | 64,340 | $ | 41,767 | $ | 47,099 | ||||||||
Work-in-progress | 16,168 | 13,621 | 8,779 | 10,622 | ||||||||||||
Finished goods | 26,259 | 18,071 | 20,707 | 21,807 | ||||||||||||
Total inventories, net | $ | 114,058 | $ | 96,032 | $ | 71,253 | $ | 79,528 |
Inventory valued using the FIFO method was $67,750$34,636 and $57,004$33,220 at December 31, 20132014 and 2012,2013, respectively. Inventory valued using the average cost method was $46,308$36,617 and $39,028$46,308 at December 31, 20132014 and 2012,2013, respectively.
Pre-production Costs Related to Long-term Supply Arrangements
Engineering, research and development and other design and development costs for products sold on long-term supply arrangements are expensed as incurred unless the Company has a contractual guarantee for reimbursement from the customer. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company either has title to the assets or has the noncancelable right to use the assets during the term of the supply arrangement are capitalized in property, plant and equipment and amortized to cost of sales over the shorter of the term of the arrangement or over the estimated useful lives of the assets, typically three to five years. Costs for molds, dies and other tools used to make products sold on long-term supply arrangements for which the Company has a contractual guarantee to a lump sum reimbursement from the customer are capitalized as a component of prepaid expenses and other current assets within the consolidated balance sheets. The amounts recorded related to these pre-production costs as of December 31, 2014 and 2013 were $10,067 and $11,584 respectively.
Discontinued Operations
Wiring Business
On May 26, 2014, the Company entered into an asset purchase agreement to sell substantially all of the assets and liabilities of the former Wiring segment to Motherson Sumi Systems Ltd., an India-based manufacturer of diversified products for the global automotive industry and a limited company incorporated under the laws of the Republic of India, and MSSL (GB) LIMITED, a limited company incorporated under the laws of the United Kingdom (collectively, “Motherson”), for $65,700 in cash and the assumption of certain related liabilities of the Wiring business.
On August 1, 2014, the Company completed the sale of substantially all of the assets and liabilities of its Wiring business to Motherson for $71,386 in cash that consisted of the stated purchase price and estimated working capital on the closing date. The final purchase price is subject to post-closing working capital and other adjustments, which impacts the loss on disposal recorded in discontinued operations. The disputed items regarding the working capital and other adjustments that have not been amicably resolved between the Company and Motherson are being determined by an independent accountant in accordance with the asset purchase agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company recorded a loss on disposal, net of tax of $8,576 for the year ended December 31, 2014 which included the recognition of previously deferred foreign currency translation of $2,734, income tax on the sale of Wiring’s Mexican businesses of $1,621 and transaction costs of $1,384. The loss on disposal increased by $795 from the previously reported amount as of September 30, 2014 primarily due to adjustments related to working capital and other adjustments as well as additional transaction costs.
The Company also entered into short-term transition services agreements with Motherson expected to conclude in the first quarter of 2015 associated with information systems, accounting, administrative, occupancy and support services as well as contract manufacturing and production support in Estonia.
The Company’s Electronics segment had post-disposition sales (August 1, 2014 through December 31, 2014) to the Wiring business acquired by Motherson of $12,230 for the five months ended December 31, 2014. Post-disposition purchases by the Company’s Electronics segment from the Wiring business acquired by Motherson were $269 for the five months ended December 31, 2014.
The following tables display summarized activity in our condensed consolidated statements of operations for discontinued operations during the years ended December 31, 2014, 2013 and 2012, were $12,944 and $8,631, respectively.related to the Wiring business.
Years ended December 31 | 2014(A) | 2013 | 2012 | |||||||||
Net sales | $ | 167,434 | $ | 288,344 | $ | 326,047 | ||||||
Cost of goods sold(C) | 154,787 | 268,278 | 286,670 | |||||||||
Selling, general and administrative(C) | 12,697 | 22,765 | 30,553 | |||||||||
Interest expense, net | 69 | 250 | 164 | |||||||||
Other expense (income), net | (58 | ) | (357 | ) | 289 | |||||||
Income (loss) from operations of discontinued operations before income taxes(C) (D) | (61 | ) | (2,592 | ) | 8,371 | |||||||
Income tax provision on discontinued operations | (750 | ) | (1,429 | ) | (845 | ) | ||||||
Income (loss) from discontinued operations, net of tax | (811 | ) | (4,021 | ) | 7,526 | |||||||
Loss on disposal(B) | (6,955 | ) | - | - | ||||||||
Income tax provision on loss on disposal | (1,621 | ) | - | - | ||||||||
Loss on disposal, net of tax | (8,576 | ) | - | - | ||||||||
Income (loss) from discontinued operations | $ | (9,387 | ) | $ | (4,021 | ) | $ | 7,526 |
(A) | The operations of the Wiring business were presented only for the seven months ended July 31, 2014 as the sale was completed on August 1, 2014. |
(B) | Included in loss on disposal for the year ended December 31, 2014 were transaction costs of $1,384 and $2,734 in previously deferred foreign currency translation. |
(C) | The assets and liabilities of the Wiring business were reclassified as held for sale effective May 26, 2014. Accordingly, depreciation and amortization for the related Wiring assets were not recorded after that date. |
(D) | Management fees, which had been reported in the Wiring business in prior periods, of $7,482 and $8,659 for the years ended December 31, 2013 and 2012, respectively, have been excluded as they are not directly attributable to the business. |
45 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Years ended December 31 | 2014 | 2013 | 2012 | |||||||||
Depreciation and amortization | $ | 2,111 | $ | 4,978 | $ | 5,054 | ||||||
Capital expenditures | 1,238 | 3,768 | 3,443 |
Intercompany sales to Wiring were $17,448, $25,353 and $30,857 for the periods ended July 31, 2014, December 31, 2013 and December 31, 2012, respectively.
Intercompany purchases from Wiring were $4,025, $7,593 and $5,670 for the periods ended July 31, 2014, December 31, 2013 and December 31, 2012, respectively.
The following table displays a summary of the Wiring assets and liabilities of discontinued operations as of December 31, 2013.
Assets | ||||
Accounts receivable, less reserves | $ | 31,287 | ||
Inventories, net | 34,530 | |||
Prepaid expenses and other current assets | 1,786 | |||
Property, plant and equipment, net | 24,549 | |||
Goodwill | 4,173 | |||
Intangible assets, net | 344 | |||
Other assets | 300 | |||
Current assets of discontinued operations | $ | 96,969 | ||
Liabilities | ||||
Accounts payable | 27,413 | |||
Accrued expenses and other current liabilities | 9,341 | |||
Current liabilities of discontinued operations | $ | 36,754 | ||
Total net assets of discontinued operations | $ | 60,215 |
46 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and consist of the following:
As of December 31 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Land and land improvements | $ | 4,861 | $ | 5,117 | $ | 4,036 | $ | 4,236 | ||||||||
Buildings and improvements | 43,630 | 45,940 | 34,517 | 35,804 | ||||||||||||
Machinery and equipment | 208,243 | 196,003 | 154,204 | 155,790 | ||||||||||||
Office furniture and fixtures | 8,351 | 8,856 | 6,247 | 7,147 | ||||||||||||
Tooling | 70,050 | 71,045 | 67,135 | 70,050 | ||||||||||||
Information technology | 33,759 | 33,009 | 22,132 | 22,589 | ||||||||||||
Vehicles | 426 | 1,456 | 65 | 303 | ||||||||||||
Leasehold improvements | 3,447 | 3,560 | 2,207 | 2,242 | ||||||||||||
Construction in progress | 14,336 | 17,656 | 16,933 | 10,566 | ||||||||||||
Total property, plant, and equipment | 387,103 | 382,642 | 307,476 | 308,727 | ||||||||||||
Less: accumulated depreciation | (276,231 | ) | (263,495 | ) | (222,165 | ) | (222,404 | ) | ||||||||
Property, plant and equipment, net | $ | 110,872 | $ | 119,147 | $ | 85,311 | $ | 86,323 |
Depreciation is provided using the straight-line method over the estimated useful lives of the assets. Depreciation expense for the years ended December 31, 2014, 2013 and 2012 was $22,299, $24,099 and 2011 was $28,989, $28,519 and $18,847,$23,674, respectively. Depreciable lives within each property classification are as follows:
Buildings and improvements | 10-40 years | |
Machinery and equipment | 3-10 years | |
Office furniture and fixtures | 3-10 years | |
Tooling | 2-5 years | |
Information technology | 3-5 years | |
Vehicles | 3-5 years | |
Leasehold improvements | shorter of lease term or 3-10 years |
Maintenance and repair expenditures that are not considered improvements and do not extend the useful life of the property, plant and equipment are charged to expense as incurred. Expenditures for improvements and major renewals are capitalized. When assets are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any gain or loss on the disposition is recorded in the consolidated statements of operations as a component of selling, general and administrative expenses.
Impairment of Long-Lived or Finite-Lived Assets
The Company reviews the carrying value of its long-lived assets and finite-lived intangible assets for impairment when events or circumstances indicate that their carrying value may not be recoverable. Factors the Company considers important that could trigger testing of the related asset groups for an impairment include current period operating or cash flow losses combined with a history of operating or cash flow losses, a projection or forecast that demonstrates continuing losses, significant adverse changes in the business climate within a particular business or current expectations that a long-lived asset will be sold or otherwise disposed of significantly before the end of its estimated useful life. To test for impairment, the estimated undiscounted cash flows expected to be generated from the use and disposal of the asset or asset group is compared to its carrying value. An asset group is established by identifying the lowest level of cash flows generated by the group of assets that are largely independent of cash flows of other assets. If cash flows cannot be separately and independently identified for a single asset, we will determine whether an impairment has occurred for the group of assets for which we can identify projected cash flows. If these undiscounted cash flows are less than their respective carrying values, an impairment charge would be recognized to the extent that the carrying values exceed estimated fair values. Although third-party estimates of fair value are utilized when available, theThe estimation of undiscounted cash flows and fair value requires us to make assumptions regarding future operating results. The results of the impairment testing are dependent on these estimates which require judgment. The occurrence of certain events, including changes in economic and competitive conditions, could impact cash flows eventually realized and management’s ability to accurately assess whether an asset is impaired.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
DuringDue to the year ended December 31, 2011,impairment of the PST goodwill in 2014, the Company recordedperformed an evaluation of PST’s long-lived assets and concluded that there was no impairment charge of $807 in its Wiring reportable segment related to certain capitalized software costs that were determined toresulting from the lower forecasted undiscounted future cash flows.
There we no longer represent a future realizable benefit. This charge is recorded in the consolidated statements of operations as a component of selling, general and administrative expenses. No material impairment charges were recorded in 2013 or 2012 for long-lived or finite-lived intangible assets.
Acquisitions
PST Eletrônica Ltda.
On December 31, 2011, the Company acquired a controlling interestassets in PST, by increasing its interest from 50% to 74%. Prior to the acquisition of the additional interest, the PST joint venture was accounted for under the equity method of accounting. On the date of acquisition of controlling interest, PST became a consolidated subsidiary and a new reportable segment of the Company. PST’s results of operations were consolidated and included in the Company’s consolidated statements of operations, comprehensive income and cash flows for the year ended December 31,2014, 2013 andor 2012. For the year ended December 31, 2011, PST’s results of operations and cash flows were included in the Company’s consolidated statements of operations and cash flows as equity in earnings of investees. PST’s financial position is included in the consolidated balance sheets at December 31, 2013 and 2012.
As a result of obtaining a controlling interest in PST, the Company’s previously held 50% equity interest in PST of $38,746 was remeasured to an acquisition date fair value of $104,118. The Company recognized a one-time non-cash pre-tax gain on previously held equity interest of $65,372 as a result of this remeasurment in the fourth quarter of 2011.
The acquisition date fair value of the total consideration transferred consisted of the following:
Cash | $ | 29,669 | ||
Common Shares (1,940,413 shares) | 15,310 | |||
Fair value of consideration transferred | 44,979 | |||
Fair value of the Company's previously held equity interest | 104,118 | |||
Fair value of noncontrolling interest | 48,727 | |||
Total fair value of PST | $ | 197,824 |
Of the $44,979 consideration transferred for the additional 24% interest, $29,976 ($19,779 of cash and $10,197 of the fair value of 1,293,609 Company Common Shares) was transferred on January 5, 2012, in accordance with the terms of the purchase agreement.
The fair value of the Common Shares transferred was based on the closing market price of the Company’s Common Shares on the acquisition date, less a discount for a lack of short-term marketability as the Common Shares transferred were issued through a private placement.
Goodwill of $67,118 was calculated as the excess of the fair value of consideration transferred over the fair market value of the identifiable assets and liabilities and represents the future economic benefits arising from other assets acquired that could not be separately recognized. Goodwill is reported in the Company’s PST segment and is not deductible for income tax purposes.
The Company identified $97,398 of intangible assets that include; $47,126 assigned to customer lists with a 15 year useful life; $31,400 assigned to trademarks with a 20 year useful life; and $18,872 assigned to technology with a 17 year weighted-average useful life. The fair value of the identifiable intangible assets was determined using an income approach.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The following unaudited pro forma information reflects the Company’s consolidated results of operations as if the acquisition had occurred on January 1, 2011. The unaudited pro forma information is not necessarily indicative of the results of operations that the Company would have reported had the transaction actually occurred at the beginning this period, nor is it necessarily indicative of future results.
Years ended December 31 | 2011 | |||
Net sales | $ | 999,553 | ||
Net income attributable to Stoneridge, Inc. | $ | 10,608 |
The unaudited pro forma financial information presented in the table above has been adjusted to give effect to adjustments that are directly related to the business combination and factually supportable. These tax affected adjustments include, but are not limited to depreciation and amortization related to fair value adjustments to property, plant, and equipment, intangible assets and inventory.
Bolton Conductive Systems, LLC
On October 13, 2009, the Company acquired a 51% controlling interest in Bolton Conductive Systems, LLC (“BCS”) for a purchase price of $5,967, net of cash acquired. BCS designs and manufactures a wide variety of electrical solutions for the military, automotive, marine and specialty vehicle markets. The Company purchased the remaining 49% noncontrolling interest in BCS in February 2013 for a nominal amount, which was treated as an equity transaction.
During the period from February 2013 through December 2013, 100% of BCS results of operations were included in the Company’s consolidated statements of operations. During the years ended December 31, 2012 and 2011, 49% of BCS’s results were included within loss attributable to noncontrolling interest within the consolidated statements of operations.
Goodwill and Other Intangible Assets
Goodwill
The total purchase price associated with acquisitions is allocated to the acquisition date fair values of identifiable assets acquired and liabilities assumed with the excess purchase price assigned to goodwill.
In 2011, the Company recorded goodwill of $67,118 related to the acquisition of PST (see Acquisitions above). In 2009, the Company recorded goodwill of $9,118 within the Wiring segment related to the BCS acquisition. The goodwill related to these acquisitions is not deductible for income tax purposes. The remainder of the December 31, 2013 and 2012 goodwill balance relates to the 2008 acquisition of Magnum Trade AB, which is included within the Electronics segment.
Goodwill as of December 31, 2013 and 2012, and changes in the carrying amount of goodwill by segment were as follows:
Control | ||||||||||||||||||||
Electronics | Wiring | Devices | PST | Total | ||||||||||||||||
Balance at January 1, 2012 | $ | 564 | $ | 4,173 | $ | - | $ | 67,118 | $ | 71,855 | ||||||||||
Currency translation | 34 | - | - | (5,508 | ) | (5,474 | ) | |||||||||||||
Balance at December 31, 2012 | 598 | 4,173 | - | 61,610 | 66,381 | |||||||||||||||
Currency translation | 6 | - | - | (7,866 | ) | (7,860 | ) | |||||||||||||
Balance at December 31, 2013 | $ | 604 | $ | 4,173 | $ | - | $ | 53,744 | $ | 58,521 |
Goodwill is subject to an annual assessment for impairment (or more frequently if impairment indicators arise) by applying a fair value-based test.
The Company performedrecorded goodwill related to the acquisition of controlling interest in PST in 2011, all of which was deemed to be impaired in 2014. The remaining goodwill balance at December 31, 2014 relates to the acquisition of two European aftermarket distributors, which is included within the Electronics segment.
Goodwill and changes in the carrying amount of goodwill by segment for the years then ended December 31, 2014 and 2013 were as follows:
Control | ||||||||||||||||
Electronics | Devices | PST | Total | |||||||||||||
Balance at January 1, 2013 | $ | 598 | $ | - | $ | 61,610 | $ | 62,208 | ||||||||
Currency translation | 6 | - | (7,866 | ) | (7,860 | ) | ||||||||||
Balance at December 31, 2013 | $ | 604 | - | $ | 53,744 | $ | 54,348 | |||||||||
Acquisition of aftermarket business | 664 | - | - | 664 | ||||||||||||
Goodwill impairment | - | - | (51,458 | ) | (51,458 | ) | ||||||||||
Currency translation | (190 | ) | - | (2,286 | ) | (2,476 | ) | |||||||||
Balance at December 31, 2014 | $ | 1,078 | $ | - | $ | - | $ | 1,078 |
The Company conducted its annual goodwill impairment test for its majority owned subsidiary, PST Eletrônica Ltda. (“PST”) on October 1, 2013 without a need to expand the impairment test to “step two” of goodwillASC 350 as PST’s calculated fair value exceeded its carrying value by approximately 10% and no indicators of impairment were identified as disclosed in the Company’s 2013 Form 10-K.
During the second quarter of 2014, however, indicators of potential impairment required the Company to conduct an interim impairment test. Those indicators included a decline in recent operating results and lower growth expectations primarily due to the weakening of the Brazilian economy and automotive market. In accordance with ASC 350, the Company completed “step one” of the impairment analysis and concluded that, as of the beginning of the fourth quarter. The Company utilized an income approach (discounted cash flow method) valuation technique in determiningJune 30, 2014, the fair value of the PST reportable segment was below its carrying value, including goodwill. As a result, “step two” of the impairment test was initiated in accordance with ASC 350. The Company recorded its best estimate of $29,300 as a non-cash goodwill impairment charge (of which $6,436 was attributable to noncontrolling interest) as of June 30, 2014. Based on the Company’s applicable reporting unitscompleted “step two” analysis in the third quarter of 2014, the final goodwill impairment as of June 30, 2014 was $23,498 (of which $5,162 was attributable to noncontrolling interest). As such, the Company recorded an adjustment to reduce the goodwill impairment by $5,802 (of which $1,274 was attributable to noncontrolling interest) as of September 30, 2014.
In the fourth quarter of 2014, the Company conducted its annual goodwill impairment test for PST and completed “step one” of the impairment test concluding that as of October 1, 2014 the fair value of the PST reportable segment was less than its carrying value, including goodwill. PST’s fair value decreased further due to significantly lower sales and earnings growth expectations which were a result of lower forecasted growth in the Brazilian economy and automotive market and a forecasted decline in currency exchange rates thereby increasing PST’s material costs. Based on the completed “step two” analysis, a goodwill impairment charge of $27,960 (of which $6,142 was attributable to noncontrolling interest) was recorded in the fourth quarter of 2014 which represented all of the remaining PST goodwill. The discounted cash flow method utilizes a market-derived rate of returnaggregate goodwill impairment for the year ended December 31, 2014 was $51,458 (of which $11,304 was attributable to discount anticipated performance.
The income approach methodology is applied to the reporting units’ projected future financial performance. The impairment review is highly judgmental and involves the use of significant estimates and assumptions. These estimates and assumptions have a significant impact on the amount of impairment charge recorded, if any. The discounted cash flow method is dependent upon assumption of future sales trends, market conditions and cash flows of each reporting unit over several years. Actual cash flows in the future may differ significantly from those previously forecasted. Other significant assumptions include growth rates and the discount rate applicable to future cash flows.noncontrolling interest).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
DuringThe fair value measurement of the year ended December 31, 2011,reporting unit under the “step one” analysis and the “step two” analysis (a non-recurring fair value measure) in their entirety are classified as Level 3 inputs. The estimates and assumptions underlying the fair value calculations used in the Company's impairment test are uncertain by their nature and can vary significantly from actual results. Factors that management must estimate include, but are not limited to, industry and market conditions, sales volume and pricing, raw material costs, capital expenditures, working capital changes, cost of capital, debt-equity mix and tax rates. The estimates and assumptions that most significantly affect the fair value calculation are sales volume and the associated cash flow assumptions, market growth and weighted average cost of capital. The estimates and assumptions used in the estimate of fair value are consistent with those the Company recorded auses in its internal planning.
The “step two” of the PST goodwill impairment chargetest utilized the following methodologies in determining fair value. Buildings and machinery were valued at an estimated replacement cost for an asset of $4,945 withincomparable age and condition. PST finite lived identified intangible assets are customer relationships, tradenames and technology. Customer relationships were valued using an excess earnings method, using various inputs such as the Wiring reportable segment. The goodwill impairment charge reducedestimated customer attrition rate, future earnings forecast, the amount of contributory asset charges, and a discount rate. Tradenames and technology intangibles are valued using a relief from royalty method, which is based upon comparable market royalty rates for tradenames of similar value. Other working capital items are generally recorded at carrying value, of BCS goodwill to $4,173 and wasunless there were known conditions that would impact the resultultimate settlement amount of a decline in business activity due to a reduction in military and defense related spending by customers since the Company’s acquisition of BCS. No impairment was identified in the Wiring segment for the years ended December 31, 2013 or 2012.particular item.
The Company’s accumulated goodwill impairment loss for the years endedwas $300,083 and $248,625 at December 31, 2014 and 2013, respectively. In addition to PST’s 2014 goodwill impairment, the accumulated goodwill impairment loss includes the goodwill impairment recorded by the Company’s Control Devices segment in 2008 and 2012 was $253,570.2004.
Other Intangible Assets
Other intangible assets, net at December 31, 20132014 and 20122013 consisted of the following:
Acquisition | Accumulated | Acquisition | Accumulated | |||||||||||||||||||||
As of December 31, 2013 | cost | amortization | Net | |||||||||||||||||||||
As of December 31, 2014 | cost | amortization | Net | |||||||||||||||||||||
Customer lists | $ | 38,451 | $ | (5,402 | ) | $ | 33,049 | $ | 33,686 | $ | (6,687 | ) | $ | 26,999 | ||||||||||
Trademarks | 25,572 | (2,943 | ) | 22,629 | ||||||||||||||||||||
Tradenames | 22,224 | (3,338 | ) | 18,886 | ||||||||||||||||||||
Technology | 15,111 | (1,947 | ) | 13,164 | 13,327 | (2,575 | ) | 10,752 | ||||||||||||||||
Other | 57 | (57 | ) | - | 50 | (50 | ) | - | ||||||||||||||||
Total | $ | 79,191 | $ | (10,349 | ) | $ | 68,842 | $ | 69,287 | $ | (12,650 | ) | $ | 56,637 |
Acquisition | Accumulated | Acquisition | Accumulated | |||||||||||||||||||||
As of December 31, 2012 | cost | amortization | Net | |||||||||||||||||||||
As of December 31, 2013 | cost | amortization | Net | |||||||||||||||||||||
Customer lists | $ | 43,973 | $ | (3,166 | ) | $ | 40,807 | $ | 37,736 | $ | (5,031 | ) | $ | 32,705 | ||||||||||
Trademarks | 29,252 | (1,870 | ) | 27,382 | ||||||||||||||||||||
Tradenames | 25,143 | (2,514 | ) | 22,629 | ||||||||||||||||||||
Technology | 17,323 | (1,115 | ) | 16,208 | 15,111 | (1,947 | ) | 13,164 | ||||||||||||||||
Other | 66 | (66 | ) | - | 57 | (57 | ) | - | ||||||||||||||||
Total | $ | 90,614 | $ | (6,217 | ) | $ | 84,397 | $ | 78,047 | $ | (9,549 | ) | $ | 68,498 |
Other intangible assets, net at December 31, 2014 include customer lists, tradenames and technology of $26,625, $18,848 and $10,752, respectively, related to the PST segment with the remaining amounts related to the Electronics segment.
The Company recognized $5,275, $5,940$4,784, $5,187 and $238$5,731 of amortization expense in 2014, 2013 2012 and 2011,2012, respectively. Amortization expense is included as a component of selling, general and administrative on the consolidated statements of operations. AmortizationAnnual amortization expense for intangible assets is estimated to be approximately $5,000$4,500 for the years 20142015 through 2019 and the2020. The weighted-average remaining amortization period is approximately 1514 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
As of December 31 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Compensation related liabilities | $ | 24,631 | $ | 22,620 | $ | 17,431 | $ | 19,054 | ||||||||
Product warranty and recall obligations | 5,462 | 5,613 | 6,397 | 5,395 | ||||||||||||
Other(A) | 26,558 | 28,848 | 18,238 | 22,861 | ||||||||||||
Total accrued expenses and other current liabilities | $ | 56,651 | $ | 57,081 | $ | 42,066 | $ | 47,310 |
(A) | “Other” is comprised of miscellaneous accruals, none of which contributed a significant portion of the total. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Income Taxes
The Company accounts for income taxes using the liability method. Deferred income taxes reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not to occur. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.
Deferred tax assets are recognized to the extent that these assets are more likely than not to be realized (See Note 5). In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies, and results of recent operations. Reversal of some or all of the U.S. valuation allowance would result in the recognition of certain deferred tax assets and a decrease to income tax expense for the period the reversal is recorded.
The Company's policy is to provide for uncertain tax positions and the related interest and penalties based upon management's assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. At December 31, 2013,2014, the Company believes it has appropriately accounted for any unrecognized tax benefits (see Note 5). To the extent the Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay amounts in excess of the liability, the Company's effective tax rate in a given financial statement period may be affected.
Currency Translation
The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for the results of operations. Adjustments resulting from translation of financial statements are reflected as a component of accumulated other comprehensive loss. loss in the Company’s consolidated balance sheets.
Foreign currency transactions are remeasured into the functional currency using translation rates in effect at the time of the transaction with the resulting adjustments included on the consolidated statements of operations within other expense, net. These foreign currency transaction losses, including the impact of hedging activities, were $1,752, $4,275$1,212, $2,109 and $106$3,979 for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively.
Revenue Recognition and Sales Commitments
The Company recognizes revenues from the sale of products, net of actual and estimated returns, at the point of passage of title, which is either at the time of shipment or upon customer receipt based upon the terms of the sale. The Company collects certain taxes and fees on behalf of government agencies and remits such collections on a periodic basis. The taxes are collected from customers but are not included in net sales. Estimated returns are based on historical authorized returns. The Company often enters into agreements with its customers at the beginning of a given vehicle’s expected production life. Once such agreements are entered into, it is the Company’s obligation to fulfill the customers’ purchasing requirements for the entire production life of the vehicle. These agreements are subject to potential renegotiation from time to time, which may affect product pricing.
50 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold on the consolidated statements of operations.
Product Warranty and Recall Reserves
Amounts accrued for product warranty and recall claims are established based on the Company’s best estimate of the amounts necessary to settle future and existing claims on products sold as of the balance sheet dates. These accruals are based on several factors including past experience, production changes, industry developments and various other considerations. The Company can provide no assurances that it will not experience material claims in the future or that it will not incur significant costs to defend or settle such claims beyond the amounts accrued or beyond what the Company may recover from its suppliers. The current portion of the product warranty and recall reserve is included as a component of accrued expenses and other current liabilities on the consolidated balance sheets. Product warranty and recall includes $1,019$1,204 and $494$1,019 of a long-term liability at December 31, 20132014 and 2012,2013, respectively, which is included as a component of other long-term liabilities on the consolidated balance sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The following provides a reconciliation of changes in the product warranty and recall reserve:
Years ended December 31 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Product warranty and recall at beginning of period | $ | 6,107 | $ | 5,301 | $ | 6,414 | $ | 5,651 | ||||||||
Accruals for products shipped during period | 4,793 | 3,288 | 4,484 | 4,760 | ||||||||||||
Aggregate changes in pre-existing liabilities due to claim developments | 1,715 | 1,062 | 692 | 2,010 | ||||||||||||
Settlements made during the period (in cash or in kind) | (6,134 | ) | (3,544 | ) | ||||||||||||
Settlements made during the period | (3,989 | ) | (6,007 | ) | ||||||||||||
Product warranty and recall at end of period | $ | 6,481 | $ | 6,107 | $ | 7,601 | $ | 6,414 |
ProductDesign and Development Expenses
Costs
Expenses associated with the development of new products and changes to existing products are charged to expense as incurred and are included in the Company’s consolidated statements of operations as a separate component of selling, generalcosts and administrative.expenses. These product development costs amounted to $45,261, $44,798$41,609, $40,372 and $35,263 in$38,945 for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively, or 4.8%6.3%, 4.8%6.1% and 4.6%6.4% of net sales for these respective periods.
Research and Development Activities
The Company enters into research and development contracts with certain customers, which generally provide for reimbursement of costs. The Company incurred and was reimbursed for contracted research and development costs of $12,319, $16,982 and $16,369 for the years ended December 31, 2014, 2013 and 2012, respectively.
Share-Based Compensation
At December 31, 2013,2014, the Company had threetwo types of share-based compensation plans: (1) Long-Term Incentive Plan, as amended, (2) Directors’ Share Option Planfor employees and (3)(2) the Amended Directors’ Restricted Shares Plan. One plan is for employees and two plans arePlan, for non-employee directors. The Long-Term Incentive Plan is made up of the Long-Term Incentive Plan that was approved by the Company's shareholders on September 30, 1997, which expired on June 30, 2007, and the Amended and Restated Long-Term Incentive Plan, as amended, that was approved by shareholders on May 17, 2010, and expires on April 24, 2016.
Total compensation expense recognized as a component of selling, general and administrative expense on the consolidated statements of operations for share-based compensation arrangements was $5,406, $4,974 $4,890 and $4,423$4,890 for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively. Of these amounts, $243, $155 $47 and $375$47 for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively, were related to the Long-Term Cash Incentive Plan “Phantom Shares” discussed in Note 8. There was no share-based compensation expense capitalized in inventory during 2014, 2013 2012 or 2011.2012.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Financial Instruments and Derivative Financial Instruments
Financial instruments, including derivative financial instruments, held by the Company include cash and cash equivalents, accounts receivable, accounts payable, long-term debt, an interest rate swap, fixed price commodity contracts and foreign currency forward contracts. The carrying value of cash and cash equivalents, accounts receivable and accounts payable is considered to be representative of fair value because of the short maturity of these instruments. See Note 9 for fair value disclosures of the Company’s financial instruments.
Common Shares Held in Treasury
The Company accounts for Common Shares held in treasury under the cost method and includes such shares as a reduction of total shareholders’ equity.
Net IncomeEarnings (Loss) Per Share
Basic net incomeearnings (loss) per share was computed by dividing net income by the weighted-average number of Common Shares outstanding for each respective period. Diluted net incomeearnings (loss) per share was calculated by dividing net income (loss) attributable to Stoneridge, Inc. by the weighted-average of all potentially dilutive Common Shares that were outstanding during the periods presented.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
( However, for all periods in thousands, except share and per share data, unless otherwise indicated)which the Company recognized a net loss from continuing operations, the Company did not recognize the effect of the potential dilutive securities as their inclusion would be anti-dilutive.
Actual weighted-average Common Shares outstanding used in calculating basic and diluted net income (loss) per share were as follows:
Years ended December 31 | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
Basic weighted-average shares outstanding | 26,670,501 | 26,377,352 | 24,180,671 | 26,923,809 | 26,670,501 | 26,377,352 | ||||||||||||||||||
Effect of dilutive securities | 522,984 | 654,518 | 464,258 | - | 522,984 | - | ||||||||||||||||||
Diluted weighted-average shares outstanding | 27,193,485 | 27,031,870 | 24,644,929 | 26,923,809 | 27,193,485 | 26,377,352 |
There were no outstanding options at December 31, 2014. Options not included in the computation of diluted net income per share to purchase 20,000 59,000 and 50,00059,000 Common Shares at an average price of $15.73 $12.20 and $15.73$12.20 per share were outstanding at December 31, 2013 2012 and 2011,2012, respectively. These outstanding options were not included in the computation of diluted net incomeearnings per share because their respective exercise prices were greater than the average closing market price of Company Common Shares.Shares and the effect would be anti-dilutive.
There were 466,650, 663,750 635,850 and 419,100635,850 performance-based restricted Common Shares outstanding at December 31, 2014, 2013 and 2012, respectively. There were also 374,400 performance-based right to receive Common Shares outstanding at December 31, 2014. These restricted and right to receive Common Shares were not included in the computation of diluted earnings per share for the years ended December 31, 2014 and 2012 as the Company had a net loss from continuing operations for 2014 and 2012, and 2011, respectively.as such they would be anti-dilutive. These performance-based shares were not included in the computation of diluted net income per share because all vesting conditions have not been and are not expected to be achieved as offor the years ended December 31, 2013 and 2012 and 2011. Thesebecause all performance-based vesting conditions were not achieved. Certain of these shares may becomebe dilutive based on the Company’s ability to meet or exceedachieve future performance targets.
Deferred Finance Costs
Deferred finance costs are being amortized over the life of the related financial instrument using the straight-line method, which approximates the effective interest method. The 2.5% discount to the initial purchasers of the Company’s senior secured notes is beingwas accreted using the effective interest rate of 10.0% overthrough October 18, 2014, the life ofdate the senior notes were redeemed. During 2014, the Company redeemed the senior secured notes.notes resulting in the acceleration of the remaining deferred financing costs of $597 which were included in loss on early extinguishment of debt in the statement of operations in 2014. Deferred finance cost amortization and debt discount accretion for the years ended December 31, 2014, 2013 and 2012 was $850, $908 and 2011 was $961, $862 and $875,$855, respectively, and is included as a component of interest expense, net on the consolidated statements of operations. As of December 31, 20132014 and 2012,2013, deferred financing costs, net were $1,168$1,767 and $1,564,$1,168, respectively and were included on the consolidated balance sheets as a component of investments and other long-term assets, net.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Changes in Accumulated Other Comprehensive Loss by Component
Changes in accumulated other comprehensive loss for the years ended December 31, 20132014 and 20122013 were as follows:
Foreign | Benefit | Foreign | Unrealized | Benefit | ||||||||||||||||||||||||||||
currency | plan | currency | gain (loss) | plan | ||||||||||||||||||||||||||||
translation | on derivatives | liability | Total | |||||||||||||||||||||||||||||
Balance at January 1, 2014 | $ | (30,335 | ) | $ | (111 | ) | $ | (12 | ) | $ | (30,458 | ) | ||||||||||||||||||||
Other comprehensive loss before reclassifications | (18,002 | ) | (454 | ) | - | (18,456 | ) | |||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | 2,734 | 566 | 141 | 3,441 | ||||||||||||||||||||||||||||
Net other comprehensive income (loss), net of tax | (15,268 | ) | 112 | 141 | (15,015 | ) | ||||||||||||||||||||||||||
Balance at December 31, 2014 | $ | (45,603 | ) | $ | 1 | $ | 129 | $ | (45,473 | ) | ||||||||||||||||||||||
translation | Derivatives | liability | Total | |||||||||||||||||||||||||||||
Balance at January 1, 2013 | $ | (12,410 | ) | $ | 2,140 | $ | (12 | ) | $ | (10,282 | ) | $ | (12,410 | ) | $ | 2,140 | $ | (12 | ) | $ | (10,282 | ) | ||||||||||
Other comprehensive loss before reclassifications | (17,925 | ) | (325 | ) | - | (18,250 | ) | (17,925 | ) | (325 | ) | - | (18,250 | ) | ||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | - | (1,926 | ) | - | (1,926 | ) | - | (1,926 | ) | - | (1,926 | ) | ||||||||||||||||||||
Net other comprehensive loss, net of tax | (17,925 | ) | (2,251 | ) | - | (20,176 | ) | (17,925 | ) | (2,251 | ) | - | (20,176 | ) | ||||||||||||||||||
Balance at December 31, 2013 | $ | (30,335 | ) | $ | (111 | ) | $ | (12 | ) | $ | (30,458 | ) | $ | (30,335 | ) | $ | (111 | ) | $ | (12 | ) | $ | (30,458 | ) | ||||||||
Balance at January 1, 2012 | $ | (1,908 | ) | $ | (7,722 | ) | $ | 15 | $ | (9,615 | ) | |||||||||||||||||||||
Other comprehensive income (loss) before reclassifications | (10,502 | ) | 7,106 | - | (3,396 | ) | ||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive loss | - | 2,756 | (27 | ) | 2,729 | |||||||||||||||||||||||||||
Net other comprehensive income (loss), net of tax | (10,502 | ) | 9,862 | (27 | ) | (667 | ) | |||||||||||||||||||||||||
Balance at December 31, 2012 | $ | (12,410 | ) | $ | 2,140 | $ | (12 | ) | $ | (10,282 | ) |
Recently Issued Accounting Standards Not Yet Adopted as of December 31, 2014
In January 2015, the Financial Accounting Standards Board (“FASB”) issuedaccounting standard update (“ASU”) 2015 – 01 “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20)” that eliminates the concept of extraordinary items and their segregation from the results of ordinary operations and expands presentation and disclosure guidance to include items that are both unusual in nature and occur infrequently. The new accounting standard is effective for fiscal years beginning after December 15, 2015. The Company will adopt as of January 1, 2016. The new accounting standard is not expected to have a material impact on the Company’s consolidated financial statements or disclosures.
In June 2014, the FASB issued ASU 2014 – 12 “Stock Compensation - Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” that requires performance targets that could be achieved after the requisite service period be treated as performance conditions that affect the vesting of the award. The new accounting standard is effective for fiscal years beginning after December 15, 2015. The Company will adopt as of January 1, 2016 which is not expected to have an impact on its consolidated financial statements or financial statement disclosures.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, which is the new comprehensive revenue recognition standard that will supersede existing revenue recognition guidance under U.S. GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services.To achieve this principle, an entity identifies the contract with a customer, identifies the separate performance obligations in the contract, determines the transaction price, allocates the transaction price to the separate performance obligations and recognizes revenue when each separate performance obligation is satisfied.This ASU is effective for annual and interim periods beginning on or after December 15, 2016, and early adoption is not permitted. As such, the Company will adopt this standard in the first quarter of 2017. The Company is currently evaluating the impact of adopting this standard on its consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Recently Adopted Accounting Standards
In FebruaryApril 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)”, which amends the definition of a discontinued operation in Accounting Standards Codification (“ASC”) 205-20 and requires entities to provide additional disclosures about discontinued operations as well as disposal transactions that do not meet the discontinued-operations criteria. The new standard changes the definition of a discontinued operation and requires discontinued operations treatment for disposals of a component or group of components that represents a strategic shift that has or will have a major impact on an entity’s operations or financial results. This ASU is effective prospectively for all disposals (except disposals classified as held for sale before the adoption date) or components initially classified as held for sale in periods beginning on or after December 15, 2014. Early adoption is permitted. The Company adopted this ASU in May 2014 and has applied it prospectively to new disposals and new classifications of disposal groups as held for sale including the Wiring business.
In July 2013, the Financial Accounting Standards Board ("FASB")FASB issued ASU No. 2013-11, “Income Taxes (Topic 740)”, which requires entities to present in the financial statements an accounting standards update requiring new disclosures about reclassificationsunrecognized tax benefit, or a portion of an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from accumulated other comprehensive lossthe disallowance of a tax position. In such instances, the unrecognized tax benefit is required to net income. These disclosures may be presented on the face of the statements or in the notes to the consolidated financial statements. The standards updatestatements as a liability and not be combined with deferred tax assets. This ASU is effective for fiscal years beginning after December 15, 2012. We2013. This ASU was adopted this standards update on January 1, 2013 and revised our disclosures, see above.
In December 2011, the FASB issued an accounting standards update requiring new disclosures about financial instruments and derivative instruments that are either offset by or subject to an enforceable master netting arrangement or similar agreement. The standards update is effective for fiscal years beginning after December 15, 2012. We adopted this standards update on January 1, 20132014 which had nodid not have a material impact on our disclosures.
Reclassifications
Certain prior period amounts have been reclassified to conform to their 2013 presentation in the Company’s consolidated financial statements.
3. Investments
Minda Stoneridge Instruments Ltd.
The Company has a 49% interest in Minda, a company based in India that manufactures electronics, instrumentation equipment and sensors for the motorcycle and commercial vehicle markets. The investment is accounted for under the equity method of accounting. The Company’s investment in Minda, recorded as a component of investments and other long-term assets, net on the consolidated balance sheets, was $5,981$6,653 and $6,215$5,981 as of December 31, 20132014 and 2012,2013, respectively. Equity in earnings of Minda included in the consolidated statements of operations was $815, $476 $760 and $1,229$760 for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively.
PST Eletrônica Ltda.
The Company has a 74% controlling interest in PST for the years ended December 31, 2014, 2013 and 2012. Noncontrolling interest in PST decreased by $16,990 to $22,550 at December 31, 2014 due to a proportionate share of its net loss of $13,483 including goodwill impairment for the year ended December 31, 2014 and an unfavorable change in foreign currency translation of $3,507. Noncontrolling interest in PST decreased by $4,537 to $39,540 at December 31, 2013 due to aan unfavorable change in foreign currency translation of $5,706 and a dividend of $212 partially offset by a proportionate share of its net income of $1,381$1,377 for the year ended December 31, 2013. Noncontrolling interest in PST decreased by $4,651 to $44,076 atfor the year ended December 31, 2012 due to aan unfavorable change in foreign currency translation of $3,918 and a proportionate share of its net loss of $733 for the year ended December 31, 2012. $733.
Comprehensive loss related to the PST noncontrolling interest was $16,990, $4,325 and $4,651 for the years ended December 31, 2014, 2013 and 2012, respectively.
PriorPST has declared dividends payable to the acquisitionnoncontrolling interest and a former shareholder of controlling interest on$10,842 Brazilian real ($4,082) and $13,246 Brazilian real ($5,654) at December 31, 2011, PST was an unconsolidated joint venture accounted for under the equity method of accounting. Condensed financial information of PST for the year ended December 31, 2011 was as follows:
Net sales | $ | 234,160 | ||
Cost of goods sold | $ | 132,489 | ||
Total income before income taxes | $ | 20,995 | ||
The Company's share of income before income taxes | $ | 10,498 |
Equity in earnings of PST included in the consolidated statements of operations was $8,805 for the year ended December 31, 2011.
2014 and 2013, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
4. Debt
Weighted | Interest rates at | |||||||||||||||||||||||||||||
Principal Outstanding at | Average | December 31, | December 31, | December 31, | ||||||||||||||||||||||||||
December 31, | December 31, | Interest as of | 2014 | 2013 | 2014 | Maturity | ||||||||||||||||||||||||
2013 | 2012 | December 31, 2013 | Maturity | |||||||||||||||||||||||||||
Revolving Credit Facilities | ||||||||||||||||||||||||||||||
Asset-based credit facility | $ | - | $ | - | N/A | Dec - 2016 | ||||||||||||||||||||||||
BCS revolver | - | 1,160 | N/A | Feb - 2013 | ||||||||||||||||||||||||||
Total revolving credit facilities | $ | - | $ | 1,160 | ||||||||||||||||||||||||||
Revolving Credit Facility | ||||||||||||||||||||||||||||||
Credit facility | $ | 100,000 | $ | - | 1.82 | % | September - 2019 | |||||||||||||||||||||||
Debt | ||||||||||||||||||||||||||||||
Senior secured notes, net of discount | ||||||||||||||||||||||||||||||
and swap fair value adjustment(A) | $ | 173,061 | $ | 173,916 | 9.50 | % | Oct - 2017 | |||||||||||||||||||||||
PST short-term notes | 4,822 | 16,161 | 1.70% - 16.56 | % | Various 2014 | |||||||||||||||||||||||||
Senior secured notes, net of discount and swap fair value adjustment | $ | - | $ | 173,061 | N/A | Redeemed | ||||||||||||||||||||||||
PST short-term obligations | 11,249 | 4,822 | 12.72% - 14.94 | % | Various 2015 | |||||||||||||||||||||||||
PST long-term notes | 16,896 | 8,155 | 4.00% - 5.50 | % | 2014 - 2019 | 16,770 | 16,896 | 4.00% - 8.00 | % | 2016 - 2021 | ||||||||||||||||||||
Suzhou note | 1,487 | 1,445 | 7.00 | % | Feb - 2014 | 1,450 | 1,487 | 6.72 | % | April - 2015 | ||||||||||||||||||||
Other | 966 | 559 | 837 | 966 | ||||||||||||||||||||||||||
Total debt | 197,232 | 200,236 | 30,306 | 197,232 | ||||||||||||||||||||||||||
Less: current portion | (12,187 | ) | (18,925 | ) | (19,655 | ) | (12,187 | ) | ||||||||||||||||||||||
Total long-term debt, net | $ | 185,045 | $ | 181,311 | $ | 10,651 | $ | 185,045 |
(A) Weighted-average interest rate excludes the impact of the Company’s interest rate swap and the accretion of debt discount.
Revolving Credit FacilitiesFacility
On November 2, 2007, the Company entered into an asset-based credit facility (the “Credit Facility”), which permitspermitted borrowing up to a maximum level of $100,000. The Company entered into an Amended and Restated Credit and Security Agreement and a Second Amended and Restated Credit and Security Agreement (the “Second Amended and Restated Agreement”) on September 20, 2010 and December 1, 2011, respectively. The Second
On September 12, 2014, the Company entered into a Third Amended and Restated Credit Agreement extended(the “Amended Agreement”). The Amended Agreement provides for a $300,000 revolving credit facility, which replaces the Company’s existing $100,000 asset-based credit facility and includes a letter of credit subfacility, swing line subfacility and multicurrency subfacility. The amended revolving credit facility (the “Credit Facility”) also has an accordion feature which allows the Company to increase the availability by up to $80,000 upon the satisfaction of certain conditions. The Amended Agreement extends the termination date of the Company’s Credit Facility to September 12, 2019 from December 1, 2016, increased2016. In 2014, the borrowing base by increasingCompany capitalized $1,666 of deferred financing costs and recognized a $100 loss on extinguishment of previously recorded deferred financing costs associated with the sublimitAmended Agreement.
Borrowings under the Amended Agreement bear interest at either the Base Rate, as defined, or the LIBOR Rate, at the Company’s option, plus the applicable margin as set forth in the Amended Agreement. The Company is also subject to a commitment fee ranging from 0.20% to 0.35% based on eligible inventory located at Mexican facilitiesthe Company’s leverage ratio. The agreement governing our Credit Facility requires the Company to maintain a maximum leverage ratio of 3.00 to 1.00, and made changesa minimum interest coverage ratio of 3.50 to certain1.00 and places a maximum annual limit on capital expenditures. The Amended Agreement also contains other affirmative and negative covenants relatingand events of default that are customary for credit arrangements of this type including covenants which place restrictions and/or limitations on the Company’s ability to among other things, guarantees, investments,borrow money, make capital expenditures and permitted indebtedness. The Credit Facility requires a commitment fee of 0.375% on the unused balance. Interest is payable quarterly at either (i) the higher of the prime rate or the Federal Funds rate plus 0.50%, plus a margin of 0.00% to 0.25% or (ii) LIBOR plus a margin of 1.00% to 1.75%, depending upon the Company’s undrawn availability, as defined.
The available borrowing capacitypay dividends. Borrowings outstanding on the Credit Facility is based on eligible current assets, as defined. Atat December 31, 2014 and 2013 were $100,000 and 2012, the Company had undrawn borrowing capacity of approximately $71,072 and $74,060, respectively, based on eligible current assets. The Credit Facility contains financial performance covenants which would only constrain the Company’s borrowing capacity if our undrawn availability falls below $20,000. However, restrictions include limits on capital expenditures, operating leases, dividends and investment activities in a negative covenant which limits investment activities to $15,000 minus certain guarantees and obligations.$0, respectively.
The Company was in compliance with all Credit Facility covenants at December 31, 20132014 and 2012.
On October 13, 2009, BCS entered into a master revolving note (the "BCS Revolver"), subject to an annual renewal, which permitted borrowing up to a maximum level of $3,000. At December 31, 2012, the Company had outstanding borrowings under this facility of $1,160 and did not have any remaining borrowing capacity based on an advance formula, as defined. The BCS Revolver was paid off and the agreement was terminated in February 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Debt
On October 4, 2010, the Company issued $175,000 of senior secured notes which were included as a componentbear interest at an annual rate of long-term debt, net9.5% and mature on the consolidated balance sheets.October 15, 2017. The senior secured notes were issued at a 2.5% discount to the initial purchasers for which the remaining balance at December 31, 2014 and 2013 was $0 and 2012 was $2,732, and $3,296, respectively. The senior secured notes are redeemable in full, at the Company’s option, beginning October 15, 2014 at 104.75%. Interest payments arewere payable on April 15 and October 15 of each year.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
On September 2, 2014, the Company redeemed $17,500 or 10.0%, of its senior secured notes at a price of 103.0% of the principal amount. As a result of the redemption, the Company recognized a loss on extinguishment of debt of $820 in the third quarter of 2014, which includes a premium of $525 and the acceleration of both the associated deferred financing costs and original issue discount totaling $295.
On October 15, 2014, the Company redeemed the remaining $157,500 of its senior secured notes at a price of 104.75% of the principal amount discharging the corresponding senior notes indenture. As a result of the redemption, the Company recognized a loss on extinguishment of debt of $9,687 in the fourth quarter of 2014, which includes a premium of $7,481 and the acceleration of the remaining deferred financing costs of $535, original issue discount of $2,019 and de-designation date unrecognized gain on the interest rate swap of $348. The senior secured notes indenture limitswere redeemed using funds from borrowing $100,000 under the amountCredit Facility as well as proceeds from the sale of the Company and its restricted subsidiaries’ indebtedness, restricts certain payments and includes various other non-financial restrictive covenants. The Company was in compliance with all covenants at December 31, 2013 and 2012. The senior secured notes are guaranteed by all of the Company’s existing domestic restricted subsidiaries. All other restricted subsidiaries that guarantee any indebtedness of the Company or the guarantors will also guarantee the senior secured notes.Wiring business.
Our consolidated subsidiary, PST ,maintainsmaintains several termshort-term obligations and long-term notes used for working capital purposes including a new term loanlong-term loans (the "PST note"“PST notes”) entered into on March 19, 2013in 2014 for 25,00017,770 Brazilian real which had a U.S. dollar equivalent outstanding balance of $10,697$6,690 at December 31, 2013. The2014. These PST note maturesnotes mature on FebruaryJuly 15, 20162017 and November 15, 2021 with interest payable monthlyquarterly at a fixed annual interest rate of 5.5%. PST's8.0% and 4.0%, respectively. PST’s other short-term and long-term notes also have fixed interest rates. The weighted-average interest rates of short-term and long-term debt of PST at December 31, 2014 were 13.2% and 5.5%, respectively. Depending on the specific note, interest is payable either monthly or annually. The noncurrent portion of the PST long-term notes at December 31, 2013 is $11,909 and2014 mature as follows: $6,616$17,368 in 2015, $2,122$4,171 in 2016, and $1,057$2,711 in 2017, $1,418 annually in 2017 through 2019. As of December 31, 20132018 and 2012, PST was2019, $486 in compliance with all note covenants.2020 and $447 in 2021.
On August 29, 2012,February 25, 2014, the Company's wholly-owned subsidiary located in Suzhou, China entered into a term loan for 9,000 Chinese yuan which matured in August 2013.2014. On August 21, 2013,October 17, 2014, the subsidiary entered into a new term loan for 9,000 Chinese yuan (the "Suzhou note"). which matures in April 2015. The U.S. dollar equivalent outstanding loan balance was $1,487$1,450 and $1,445$1,487 at December 31, 20132014 and 2012,2013, respectively, under these term loan agreements. The Suzhou note is included on the consolidated balance sheets as a component of current portion of long-term debt. Interest is payable quarterly at 125.0%120.0% of the one-year lending rate published by The People's Bank of China.
The Company's wholly-owned subsidiary located in Stockholm, Sweden, has an overdraft credit line which allows overdrafts on the subsidiary's bank account up to a maximum level of 20,000 Swedish krona, or $3,107$2,562 and $3,075,$3,107, at December 31, 20132014 and 2012,2013, respectively. At December 31, 2014 and 2013, and 2012, there werewas no overdraftsbalance outstanding on this bank account.
At December 31, 2013,2014, the future maturities of long-term debt were as follows:
Year ended December 31 | ||||||||
2014 | $ | 12,187 | ||||||
2015 | 6,691 | $ | 19,655 | |||||
2016 | 177,122 | 4,171 | ||||||
2017 | 1,057 | 2,711 | ||||||
2018 | 1,057 | 1,418 | ||||||
2019 | 101,418 | |||||||
Thereafter | 1,057 | 933 | ||||||
Total | $ | 199,171 | $ | 130,306 |
5. Income Taxes
The provision for income taxes included in the accompanying consolidated financial statements represents federal, state and foreign income taxes. The components of income before income taxes and the provision for income taxes consist of the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Years ended December 31 | 2013 | 2012 | 2011 | |||||||||
Income (loss) before income taxes: | ||||||||||||
Domestic | $ | (1,118 | ) | $ | 3,411 | $ | 62,510 | |||||
Foreign | 21,852 | 1,149 | 9,132 | |||||||||
Total income before income taxes | $ | 20,734 | $ | 4,560 | $ | 71,642 | ||||||
Provision for income taxes: | ||||||||||||
Current: | ||||||||||||
Federal | $ | - | - | - | ||||||||
State and foreign | 7,307 | 3,545 | 2,167 | |||||||||
Total current provision | 7,307 | 3,545 | 2,167 | |||||||||
Deferred: | ||||||||||||
Federal | - | 98 | 23,443 | |||||||||
State and foreign | (3,081 | ) | (2,831 | ) | 495 | |||||||
Total deferred provision (benefit) | (3,081 | ) | (2,733 | ) | 23,938 | |||||||
Total provision for income taxes | $ | 4,226 | $ | 812 | $ | 26,105 |
5. Income Taxes
The provision (benefit) for income taxes included in the accompanying consolidated statement of operations represents federal, state and foreign income taxes. The components of income (loss) before income taxes and the provision (benefit) for income taxes consist of the following:
Years ended December 31 | 2014 | 2013 | 2012 | |||||||||
Income (loss) before income taxes: | ||||||||||||
Domestic | $ | 1,635 | $ | 5,771 | $ | (1,511 | ) | |||||
Foreign | (54,695 | ) | 17,555 | (2,299 | ) | |||||||
Total income (loss) before income taxes | $ | (53,060 | ) | $ | 23,326 | $ | (3,810 | ) | ||||
Provision for income taxes: | ||||||||||||
Current: | ||||||||||||
Federal | $ | - | $ | - | $ | - | ||||||
State and foreign | 1,382 | 5,878 | 2,700 | |||||||||
Total current provision | 1,382 | 5,878 | 2,700 | |||||||||
Deferred: | ||||||||||||
Federal | - | - | 98 | |||||||||
State and foreign | (3,238 | ) | (3,081 | ) | (2,831 | ) | ||||||
Total deferred benefit | (3,238 | ) | (3,081 | ) | (2,733 | ) | ||||||
Total provision (benefit) for income taxes | $ | (1,856 | ) | $ | 2,797 | $ | (33 | ) |
A reconciliation of the Company’s effective income tax rate to the statutory federal tax rate is as follows:
Years ended December 31 | 2013 | 2012 | 2011 | 2014 | 2013 | 2012 | ||||||||||||||||||
Statutory U.S. deferal income tax rate | 35.0 | % | 35.0 | % | 35.0 | % | ||||||||||||||||||
Statutory U.S. federal income tax rate | (35.0 | )% | 35.0 | % | (35.0 | )% | ||||||||||||||||||
State income taxes, net of federal tax benefit | 2.7 | 3.8 | 0.2 | - | 2.4 | (4.9 | ) | |||||||||||||||||
Tax credits | (4.7 | ) | - | (1.4 | ) | (1.3 | ) | (3.5 | ) | - | ||||||||||||||
Foreign tax rate differential | (16.5 | ) | (16.1 | ) | (1.4 | ) | 0.2 | (9.5 | ) | (20.3 | ) | |||||||||||||
Reduction (increase) of income tax accruals | (1.3 | ) | 0.5 | 0.1 | ||||||||||||||||||||
Increase (reduction) of income tax accruals | 0.2 | (1.1 | ) | 0.6 | ||||||||||||||||||||
Tax on foreign dividends, net of foreign tax credits | (3.2 | ) | 45.6 | 1.1 | (0.1 | ) | (8.1 | ) | 17.5 | |||||||||||||||
Reduction of deferred taxes | 3.6 | 6.4 | 0.3 | - | 0.6 | 7.6 | ||||||||||||||||||
Valuation allowances | 2.2 | (78.3 | ) | (1.4 | ) | (2.1 | ) | (6.2 | ) | 15.8 | ||||||||||||||
Loss of domestic flow-through entity not attributable to Stoneridge, Inc. | - | 6.8 | 1.9 | |||||||||||||||||||||
Non-deductible goodwill impairment | 33.9 | - | - | |||||||||||||||||||||
Non-deductible compensation | 3.4 | 12.8 | 0.3 | 1.0 | 3.0 | 15.3 | ||||||||||||||||||
Other | (0.8 | ) | 1.3 | 1.7 | (0.3 | ) | (0.6 | ) | 2.6 | |||||||||||||||
Effective income tax rate | 20.4 | % | 17.8 | % | 36.4 | % | (3.5 | )% | 12.0 | % | (0.8 | )% |
The Company recognized a provision (benefit) for income taxes of $4,226$(1,856) or 20.4%(3.5)%, $812$2,797 or 17.8%12.0% and $26,105$(33) or 36.4%(0.8)% of income (loss) before income tax for federal, state and foreign income taxes for the years ended December 31, 2014, 2013 2012 and 2011,2012, respectively. The increasedecrease in tax expense for the year ended December 31, 20132014 compared to the same period for 20122013 was related to the improved financial performance of our Swedish and Brazilian operations. The results of our U.S. operations do not impact tax expensepredominantly due to the valuation allowance. However, the income or losstax benefit of the U.S.loss incurred by PST, as adjusted for the non-tax deductible goodwill impairment charge of $51,458. The decrease in the tax expense was partially offset by discrete tax items related to certain foreign operations does impactrecorded during the effective tax rate.current period. The decrease in the effective tax rate for 2014 to (3.5)% compared to the same period for 2013 increased primarilyof 12.0% was due to the recognition of a decline intax benefit on the financial performancePST operating loss which was offset by the impact of the U.S. operations.
non-tax deductible PST goodwill impairment and the discrete tax items discussed above.
A deferred tax liability of $456 has been recorded related to earnings that are not considered indefinitely reinvested related to Brazil.
57 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company has not recorded deferred income taxes on the remaining undistributed earnings of its foreign subsidiaries because of management’s intent and ability to indefinitely reinvest such earnings. At December 31, 20132014 the aggregate undistributed earnings of our foreign subsidiaries amounted to $27,509$31,043. The Company may be subject to U.S. income taxes and foreign withholding taxes if these earnings were distributed. It is not practicalpracticable to estimate the amount of taxes, if any, that may be payable on these earnings as that estimate depends upon circumstances that would exist at the time a remittance occurs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Significant components of the Company’s deferred tax assets and liabilities were as follows:
As of December 31 | 2013 | 2012 | 2014 | 2013 | ||||||||||||
Deferred tax assets: | ||||||||||||||||
Inventories | $ | 2,943 | $ | 3,200 | $ | 2,009 | $ | 2,943 | ||||||||
Employee salary and benefits | 3,653 | 3,860 | ||||||||||||||
Employee compensation and benefits | 3,675 | 3,653 | ||||||||||||||
Insurance | 489 | 562 | 387 | 489 | ||||||||||||
Depreciation and amortization | 2,359 | 10,029 | 1,013 | 2,359 | ||||||||||||
Net operating loss carryforwards | 45,859 | 39,834 | 48,166 | 45,859 | ||||||||||||
General business credit carryforwards | 12,900 | 11,897 | 12,697 | 12,900 | ||||||||||||
Reserves not currently deductible | 8,883 | 9,643 | ||||||||||||||
Other reserves | 7,493 | 8,883 | ||||||||||||||
Gross deferred tax assets | 77,086 | 79,025 | 75,440 | 77,086 | ||||||||||||
Less: Valuation allowance | (71,827 | ) | (71,790 | ) | (67,907 | ) | (71,827 | ) | ||||||||
Deferred tax assets less valuation allowance | 5,259 | 7,235 | 7,533 | 5,259 | ||||||||||||
Deferred tax liabilities: | ||||||||||||||||
Depreciation and amortization | (23,718 | ) | (29,615 | ) | (20,910 | ) | (23,718 | ) | ||||||||
Basis difference - equity investee | (31,016 | ) | (31,016 | ) | (31,016 | ) | (31,016 | ) | ||||||||
Other | (1,764 | ) | (4,315 | ) | (976 | ) | (1,764 | ) | ||||||||
Gross deferred tax liabilities | (56,498 | ) | (64,946 | ) | (52,902 | ) | (56,498 | ) | ||||||||
Net deferred tax liability | $ | (51,239 | ) | $ | (57,711 | ) | $ | (45,369 | ) | $ | (51,239 | ) |
The Company has concluded based on objective evidence that at December 31, 20132014 and 20122013 it is more likely than not that sufficient taxable income will not be generated to utilize the remaining U.S. federal, and certain state and foreign, deferred tax assets before they expire and as such a valuation allowance has been recorded. The valuation allowance represents the amount of tax benefit related to U.S. federal, state and foreign net operating losses, credits and other deferred tax assets.assets that are not recognized at December 31, 2014.
The Company has net operating loss carry forwards of $106,637, $96,260$113,901, $101,722 and $22,381$19,887 for U.S. federal, state and foreign tax jurisdictions, respectively. The U.S. federal net operating losses, if unused, begin to expire in December 31, 2025, the state net operating losses expire at various times and the foreign net operating losses expire at various times or have indefinite expiration dates. The Company has general business and foreign tax credit carry forwards of $12,271, $2,005$13,060, $1,991 and $1,908$1,175 for U.S. federal, state and foreign jurisdictions respectively. The U.S. federal general business credits, if unused, begin to expire in December 31, 2021, and the state and foreign tax credits expire at various times.
The Company is required to provide a deferred tax liability corresponding to the difference between the financial reporting basis (which was remeasured to fair value upon the acquisition of an additional 24% of PST in 2011) and the tax basis in the previously held 50% ownership interest in PST (the “outside” basis difference). This outside basis difference will generally remain fixed until (1) dividends from the subsidiary exceed the parent’s share of earnings subsequent to the date it became a subsidiary or (2) there is a transaction that affects the Company’s ownership of PST.
During the fourth quarter of 2010 we undertook a secondary offering. As a result of the secondary offering a substantial change in our ownership occurred and we experienced an ownership change pursuant to Section 382 of the Code. There was no impact to current or deferred income taxes resulting from the ownership change.
58 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The following is a reconciliation of the Company’s total gross unrecognized tax benefits:
2013 | 2012 | 2011 | ||||||||||
Balance as of January 1 | $ | 3,416 | $ | 3,452 | $ | 3,101 | ||||||
Tax positions related to the current year: | ||||||||||||
Additions | 217 | 93 | 381 | |||||||||
Tax positions related to the prior years: | ||||||||||||
Additions | 216 | - | 28 | |||||||||
Reductions | (71 | ) | (58 | ) | - | |||||||
Expirations of statutes of limitation | (154 | ) | (71 | ) | (58 | ) | ||||||
Balance as of December 31 | $ | 3,624 | $ | 3,416 | $ | 3,452 |
2014 | 2013 | 2012 | ||||||||||
Balance as of January 1 | $ | 3,624 | $ | 3,416 | $ | 3,452 | ||||||
Tax positions related to the current year: | ||||||||||||
Additions | 217 | 217 | 93 | |||||||||
Tax positions related to the prior years: | ||||||||||||
Additions | 168 | 216 | - | |||||||||
Reductions | - | (71 | ) | (58 | ) | |||||||
Expirations of statutes of limitation | (121 | ) | (154 | ) | (71 | ) | ||||||
Balance as of December 31 | $ | 3,888 | $ | 3,624 | $ | 3,416 |
At December 31, 20132014 the Company has classified $639$719 as a noncurrent liability and $3,329$3,299 as a reduction to non-current deferred income tax assets. The amount of unrecognized tax benefits is not expected to change significantly during the next 12 months. Management is currently unaware of issues under review that could result in a significant change or a material deviation in this estimate.
If the Company’s tax positions at December 31, 2013 are sustained by the taxing authorities in favor of the Company, approximately $3,547the amounts that would affect the Company’s effective tax rate.rate are approximately $3,851 and $3,547 at December 31, 2014 and 2013, respectively.
Consistent with historical financial reporting, the Company has elected to classify interest expense and, if applicable, penalties which could be assessed related to unrecognized tax benefits as a component of income tax expense. For the years ended December 31, 2014, 2013 2012 and 2011,2012, the Company recognized expense (benefit) of approximately $(82)$(411), $64$(82) and $67$64 of gross interest and penalties, respectively. The Company has accrued approximately $624$213 and $706$624 for the payment of interest and penalties at December 31, 20132014 and 2012,2013, respectively.
The Company conducts business globally and, as a result, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities throughout the world. The following table summarizes the open tax years for each important jurisdiction:
Jurisdiction | Open Tax Years | |
U.S. Federal | ||
Brazil | ||
China | ||
France | ||
Mexico | ||
Spain | ||
Sweden | ||
United Kingdom |
6. Operating Lease Commitments
The Company leases equipment, vehicles and buildings from third parties under operating lease agreements. For the years ended December 31, 2014, 2013 2012 and 2011,2012, lease expense totaled $8,447, $8,810$5,836, $5,842 and $7,403,$6,053, respectively.
59 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Future minimum operating lease commitments as of December 31, 20132014 were as follows:
Year ended December 31, | ||||||||
2014 | $ | 5,815 | ||||||
Year ended December 31 | ||||||||
2015 | 3,146 | $ | 2,879 | |||||
2016 | 2,069 | 2,809 | ||||||
2017 | 1,882 | 2,486 | ||||||
2018 | 1,106 | 2,289 | ||||||
2019 | 1,825 | |||||||
Thereafter | 80 | 6,345 | ||||||
Total | $ | 14,098 | $ | 18,633 |
7. Share-Based Compensation Plans
In May 2002, the Company adopted the Director Share Option Plan (“Director Option Plan”). The Company reserved 500,000 Common Shares for issuance under the Director Option Plan. Under the Director Option Plan, the Company granted cumulative options to purchase 86,000 Common Shares to directors of the Company with exercise prices equal to the fair market value of the Company’s Common Shares on the date of grant. The options granted cliff-vested one year after the date of grant and have a contractual life of 10 years. The Director Option Plan expired in May 2012.
In April 2006, the Company’s shareholders approved the Amended and Restated Long-Term Incentive Plan (the "2006 Plan") and reserved 3,000,0001,500,000 Common Shares of which the maximum number of Common Shares which may be issued subject to incentive stock options is 500,000. In May 2013,2010, shareholders approved an amendment to the 2006 Plan to increase the number of shares fromby 1,500,000 to 3,000,000 and in May 2013, shareholders approved an amendment to this plan to increase the number of shares by 1,500,000 to 4,500,000. Under the 2006 Plan, as of December 31, 2013,2014, the Company has issued 3,319,2004,000,000 restricted Common Shares and right to receive Common Shares, of which 2,145,3002,451,700 are time-based with cliff vesting using the straight-line method and 1,173,9001,548,300 are performance-based. Restricted Common Shares awarded under the Incentive Plan entitle the shareholder to all the rights of Common Share ownership except that the shares may not be sold, transferred, pledged, exchanged, or otherwise disposed of during the vesting period.
In 2008, pursuant to the 2006 Plan, the Company granted time-based restricted Common Share and performance-based restricted Common Share awards. The time-based restricted Common Share awards cliff vest three years after the grant date. The performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from date of grant and upon achieving certain net income per share targets established by the Company.
In 2009, pursuant to the 2006 Plan, the Company granted time-based restricted Common Share awards. These restricted Common Share awards cliff vest three years after the grant date.
In 2010 and 2013, pursuant to the 2006 Plan, the Company granted time-based restricted Common Share and market-based restricted Common Share awards. The time-based restricted Common Share awards cliff vest three years after the date of grant. The performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from the date of grant and upon the Company attaining certain targets of performance measured against a peer group’s performance in terms of total return to shareholders.
In 2011 and 2012, pursuant to the 2006 Plan, the Company granted time-based, market-based and performance-based restricted Common Share awards. The time-based restricted Common Share awards cliff vest three years after the date of grant. The performance-based restricted Common Share awards vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from the date of grant and, for one half of the annual awards, upon the Company attaining certain targets of performance measured against a peer group’s performance in terms of total shareholder return and, for the remaining half of the annual awards, upon achieving certain annual net income per share targets established by the Company during the performance period of the award.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In 2014, pursuant to the 2006 Plan, the Company granted time-based share units and performance shares. The time-based share units cliff vest three years after the date of grant. The performance shares vest and are no longer subject to forfeiture upon the recipient remaining an employee of the Company for three years from the date of grant and, for 20.0% of the annual awards, upon the Company attaining certain targets of performance measured against a peer group’s performance in thousands, except shareterms of total shareholder return and, for the remaining 80.0% of the annual awards, upon achieving certain annual net income per share data, unless otherwise indicated)targets established by the Company during the performance period of the award.
In April 2005, the Company adopted the Directors’ Restricted Shares Plan (“Director Share Plan”) and reserved 500,000 Common Shares for issuance under the Director Share Plan. In May 2013, shareholders approved an amendment to the Director Share Plan to increase the number of shares for issuance from 500,000by 200,000 to 700,000. Under the Director Share Plan, the Company has cumulatively issued 435,534483,904 restricted Common Shares. Shares issued annually under the Director Share Plan during 2010, 2011, 2012 and 2013 cliff vest one year after the date of grant.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Options
A summary of option activity under the plans noted above as of December 31, 2013,2014, and changes during the year ended are presented below:
Weighted- | Weighted- | |||||||||||||||||||
Weighted- | average | average | ||||||||||||||||||
average | remaining | Share | exercise | |||||||||||||||||
Share | exercise | contractual | options | price | ||||||||||||||||
options | price | term | ||||||||||||||||||
Outstanding as of December 31, 2012 | 59,000 | $ | 12.20 | |||||||||||||||||
Outstanding as of December 31, 2013 | 20,000 | $ | 15.73 | |||||||||||||||||
Expired | (39,000 | ) | $ | 10.39 | (20,000 | ) | $ | 15.73 | ||||||||||||
Exercised | - | $ | - | - | $ | - | ||||||||||||||
Outstanding and exercisable as of December 31, 2013 | 20,000 | $ | 15.73 | 0.36 | ||||||||||||||||
Outstanding and exercisable as of December 31, 2014 | - | $ | - |
There were no options granted during the years ended December 31, 2014, 2013 2012 and 2011, and all outstanding options have vested.2012.
The intrinsic value of options outstanding and exercisable is the difference between the fair market value of the Company’s Common Shares on the applicable date (“Measurement Value”) and the exercise price of those options that had an exercise price that was less than the Measurement Value. The intrinsic value of options exercised is the difference between the fair market value of the Company’s Common Shares on the date of exercise and the exercise price. There were no options exercised during the years ended December 31, 2014, 2013 and 2012. The total intrinsic value of options exercised during the year ended December 31, 2011 was $117.
As of December 31, 2013 2012, and 2011,2012, the aggregate intrinsic value of both outstanding and exercisable options was $0, $0, and $5, respectively.$0.
Restricted Shares
The fair value of the non-vested time-based restricted Common Share awards was calculated using the market value of the sharesCommon Shares on the date of issuance. The weighted-average grant-date fair value of time-based restricted Common Shares granted during the years ended December 31, 2014, 2013 and 2012 was $11.54, $6.13 and 2011 was $6.13, $9.95, and $15.79, respectively.
The fair value of the non-vested performance-based restricted Common Share awards with a performance condition requiring the Company to obtain certain earnings per share targets was estimated using the market value of the shares on the date of grant. The fair value of non-vested performance-based restricted Common Share awards with a market condition requiring the Company to obtain a total shareholder return target relative to a group of peer companies was estimated using a Monte Carlo valuation model taking into consideration the probability of achievement using multiple simulations.
61 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
A summary of the status of the Company’s non-vested restricted Common Shares and right to receive Common Shares as of December 31, 20132014 and the changes during the year then ended, are presented below:
Time-based awards | Performance-based awards | Time-based awards | Performance-based awards | |||||||||||||||||||||||||||||
Weighted- | Weighted- | Weighted- | Weighted- | |||||||||||||||||||||||||||||
Common | average grant- | Common | average grant- | Common | average grant- | Common | average grant- | |||||||||||||||||||||||||
shares | date fair value | shares | date fair value | Shares | date fair value | Shares | date fair value | |||||||||||||||||||||||||
Non-vested as of December 31, 2012 | 842,830 | $ | 10.31 | 635,850 | $ | 10.78 | ||||||||||||||||||||||||||
Non-vested as of December 31, 2013 | 1,126,870 | $ | 8.83 | 663,750 | $ | 11.45 | ||||||||||||||||||||||||||
Granted | 633,470 | $ | 6.13 | 248,850 | $ | 7.52 | 354,770 | $ | 11.54 | 374,400 | $ | 11.71 | ||||||||||||||||||||
Vested | (337,369 | ) | $ | 7.42 | - | $ | - | (310,365 | ) | $ | 12.57 | (25,645 | ) | $ | 15.79 | |||||||||||||||||
Forfeited | (12,061 | ) | $ | 9.68 | (220,950 | ) | $ | 6.92 | (84,255 | ) | $ | 8.24 | (171,455 | ) | $ | 16.88 | ||||||||||||||||
Non-vested as of December 31, 2013 | 1,126,870 | $ | 8.83 | 663,750 | $ | 11.45 | ||||||||||||||||||||||||||
Non-vested as of December 31, 2014 | 1,087,020 | $ | 8.69 | 841,050 | $ | 10.33 |
As of December 31, 2013,2014, total unrecognized compensation cost related to non-vested time-based restricted Common Share and right to receive Common Share awards granted was $3,330.$3,338. That cost is expected to be recognized over a weighted-average period of 1.931.21 years. For the years ended December 31, 2014, 2013 2012 and 2011,2012, the total fair value of time-based restricted Common Share and right to receive Common Share awards vested was $3,509, $2,177 $4,413 and $3,743,$4,413, respectively.
As of December 31, 2013,2014, total unrecognized compensation cost related to non-vested performance-based restricted Common Share and right to receive Common Share awards granted was $1,873.$1,713 for shares probable to vest. That cost is expected to be recognized over a weighted-average period of 1.251.33 years dependent upon the achievement of performance conditions. As noted above, the Company has issued and outstanding performance-based restricted Common Share awards that use different performance targets. The awards that use earnings per share as the performance target will not be expensed until it is probable that the Company will meet the underlying performance condition.
CashThere was no cash received from option exercises under allany share-based payment arrangements for the years ended December 31, 2014, 2013 2012 and 2011 was $0, $0 and $168, respectively.2012. There was no actual tax benefit realized for the tax deductions from the vesting of restricted Common Shares and option exercises of the share-based payment arrangements for the years ended December 31, 2014, 2013 2012 and 2011.2012.
8. Employee Benefit Plans
The Company has certain defined contribution profit sharing and 401(k) plans covering substantially all of its employees in the United States and United Kingdom. The Company provides matching contributions to the Company’s 401(k) plan. Company contributions are generally discretionary. The Company’s policy is to fund all benefit costs accrued. For the years ended December 31, 2014, 2013 2012 and 2011,2012, expenses related to these plans amounted to $1,469, $1,527$1,280, $1,173 and $1,801,$1,122, respectively.
The Company provides matching contributions to the Company’s 401(k) plan covering substantially all of its employees in the United States.
Long-Term Cash Incentive PlansPlan
In March 2009, the Company adopted the Stoneridge, Inc. Long-Term Cash Incentive Plan (“LTCIP”) and granted awards to certain officers and key employees. Awards under the LTCIP provided recipients with the right to receive cash three years from the date of grant depending on the Company’s actual earnings per share performance for the defined performance period. If the participant voluntarily terminated employment or was discharged for cause, as defined in the LTCIP, the award would be forfeited. In May 2009, the LTCIP was approved by the Company’s shareholders. At December 31, 2011, the Company had a liability recorded of $2,173, which was paid in March 2012 based on achievement of the performance goal. As such, no liability remains for this award at December 31, 2012 or 2013.
For 2010, the awards under the LTCIP provided recipients with the right to receive an amount of cash equal to the fair market value of a specified number of Common Shares, without par value, of the Company (“Phantom Shares”) three years from the date of grant depending on the Company’s actual earnings per share performance for each fiscal year of 2011, 2012 and 2013 within the performance period. The Company recorded an accrual based on the fair market value of the Phantom Shares for an award to be paid in the period earned based on anticipated achievement of the performance goals. If the participant voluntarily terminates employment or is discharged for cause, as defined in the LTCIP, the award will be forfeited.At December 31, 2012, the Company recorded a liability of $606 for the awards granted under the LTCIP which was included on the consolidated balance sheet as component of accrued expenses and other current liabilities. In February 2013, the 2010 awards were paid based on achievement of the performance goal. As such, no liability remains for this award at December 31, 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
For 2013, the Company granted Phantom Share awards in 2013 that vest three years from the date of grantin February 2016 depending on the Company’s actual earnings per share performance for each fiscal year of 2013, 2014 and 2015 within the performance period. As of December 31, 2013,2014, the Company has not recorded a liability of $245 for the awards granted under the LTCIP which was included on the consolidated balance sheet as the 2013 performance goal was not achieved.a component of other long-term liabilities. There were no awards granted under the LTCIP during the year ended December 31, 20122014 or 2011.2012.
62 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
9. Financial Instruments and Fair Value Measurements
Financial Instruments
A financial instrument is cash or a contract that imposes an obligation to deliver, or conveys a right to receive cash or another financial instrument. The carrying values of cash and cash equivalents, accounts receivable and accounts payable are considered to be representative of fair value because of the short maturity of these instruments. The estimated fair value of the Company’s senior secured notes with a face value of $175,000 (fixed rate debt) at December 31, 2013 and 2012 was $190,103 and $188,895, respectively,$190,100, and was determined using market quotes classified as Level 2 input within the fair value hierarchy. The Company redeemed all of the senior secured notes during 2014.
Derivative Instruments and Hedging Activities
On December 31, 2013,2014, the Company had open foreign currency forward contracts and fixed price commodity contracts and an interest rate swap.contracts. These contracts are used solely for hedging and not for speculative purposes. Management believes that its use of these instruments to reduce risk is in the Company’s best interest. The counterparties to these financial instruments are financial institutions with investment grade credit ratings.
Foreign Currency Exchange Rate Risk
The Company conducts business internationally and therefore is exposed to foreign currency exchange rate risk. The Company uses derivative financial instruments as cash flow and fair value hedges to mitigatemanage its exposure to fluctuations in foreign currency exchange rates by reducing the effect of such fluctuations on foreign currency denominated intercompany transactions, inventory purchases and other foreign currency exposures. The foreign currencies hedged by the Company during 2014 and 2013 include the euro and Mexican peso.
In certain instances, the foreign currency forward contracts do not qualify for hedge accounting and are marked to market, with gains and losses recognized in the Company’s consolidated statements of operations as a component of other expense, net.
These forward contracts were executed to hedge forecasted transactions and were accounted for as cash flow hedges. As such, the effective portion of the unrealized gain or loss was deferred and reported in the Company’s consolidated balance sheets as a component of accumulated other comprehensive loss. The cash flow hedges were highly effective. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future purchases of the euro, Swedish krona and Mexican peso.
The Company’s foreign currency forward contracts are designed to offset some of the gains and losses realized on the underlying foreign currency denominated transactions as follows:
Euro-denominated and Swedish krona-denominated Foreign Currency Forward Contracts
At December 31, 20132014 and 2012,2013, the Company held a foreign currency forward contract with an underlying notional amount of $13,335$3,523 and $12,643,$13,335, respectively, to reduce the exposure related to the Company’s euro-denominated intercompany loans. This contract expires in March 2014. During 2012, the Company also held a2015. The euro-denominated foreign currency forward contract to reducewas not designated as a hedging instrument. For the exposureyear ended December 31, 2014, the Company recognized a gain of $1,205 in the consolidated statements of operations as a component of other expense, net related to the Company’s Swedish krona-denominated intercompany loans. This contract expired on November 30, 2012. The euro-denominated and Swedish krona-denominated foreign currency forward contracts have not been designated as hedging instruments.contract. For the years ended December 31, 2013 and 2012, the Company recognized a loss of $638 and $492, respectively, in the consolidated statements of operations as a component of other expense, net related to the euro- and Swedish krona-denominated contracts. For the year ended December 31, 2011, the Company recognized a $225 gain related to foreign currency forward contracts.
U.S. dollar-denominated Foreign Currency Forward Contracts – Cash Flow Hedge
The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the euro, U.S. dollar-denominated currency contracts with a notional amount at December 31, 2014 of $4,266 which expires ratably on a monthly basis from January 2015 through December 2015, compared to $0 at December 31, 2013.
63 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The Company entered into on behalf of one of its European Electronics subsidiaries whose functional currency is the Swedish krona, U.S. dollar-denominated currency contracts with a notional amount at December 31, 2014 of $11,718 which expires ratably on a monthly basis from January 2015 through December 2015, compared to $0 at December 31, 2013.
Mexican peso-denominated Foreign Currency Forward Contracts – Cash Flow Hedge
The Company holds Mexican peso-denominated foreign currency contracts with notional amounts at December 31, 2013 totaling $45,0002014 of $10,282 which expire ratably on a monthly basis from January 2015 through December 2015, compared to $45,000 at December 31, 2013.
As a result of the sale of the Wiring business, the Company forecasted that it would purchase Mexican pesos to fulfill only two of the five hedge contracts outstanding as of June 30, 2014 for the period October 2014 through December 2014. The Company heldAs the purchase of Mexican peso-denominated foreign currency contracts with notional amounts at December 31, 2012 of 36,500 which expired ratably on a monthly basis from January 2013 through December 2013.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
These contracts were executedpesos related to hedge forecasted transactions and are accounted for as cash flow hedges. As such, the effective portionthree of the unrealizedfive hedge contracts was not probable, these three hedges attributed to the Wiring business were de-designated as of June 30, 2014 and the associated unrecognized $320 gain orat that date was reclassified from accumulated other comprehensive loss is deferred and reportedrecorded in discontinued operations in the Company’s consolidated balance sheets asstatements of operations in the quarter and year of de-designation. On August 4, 2014, the three de-designated hedges were terminated and settled resulting in a component of accumulated other comprehensive loss. The cash flow hedges are highly effective and the Company expects them to remain highly effective in future periods. The effectiveness of the transactions has been and will be measured on an ongoing basis using regression analysis and forecasted future Mexican peso purchases.nominal gain.
Commodity Price Risk - Cash Flow Hedge
To mitigate the risk of future price volatility and, consequently, fluctuations in gross margins, the Company entered into fixed price commodity contracts with a financial institution to fix the cost of a portion of the Company’s copper purchases as copper is a significant raw material.material used in the Company’s products.
The Company has fixed price commodity contracts at December 31, 20132014 with an aggregate notional amount of 1,582317 pounds, which expire on a monthly basis over the period from January through December 2014,March 2015, compared to an aggregate notional amount of 2,4361,582 pounds at December 31, 2012.
2013. All of these contracts representrepresented a portion of the Company’s forecasted copper purchases.purchases when they were entered into. These contracts were executed to hedge a portion of forecasted transactions, except for the 317 pounds outstanding at December 31, 2014, and the contracts arehave been designated and accounted for as cash flow hedges.
The unrealized gain or loss for the effective portion of the hedges is deferred and reported in the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive loss while the ineffective portion, if any, is reported in the condensed consolidated statements of operations. The effectiveness of the transactions is measured on an ongoing basis using regression analysis and forecasted future copper purchases. Based upon the results of the regression analysis, the Company has concluded that these cash flow hedges are highly effective.
The Company evaluated the effectiveness of the copper fixed price commodity contracts at each reporting date in 2014. As a result of the sale of the Wiring business, the Company forecasted that it would not purchase the quantities of copper to fulfill these hedge contracts for the period January 2015 through March 2015. As the purchase of copper quantities related to these hedge contracts was not probable, the contracts primarily associated with the Wiring segment not expected to be fulfilled were de-designated at June 30, 2014 with the associated unrecognized $77 gain reclassified from accumulated other comprehensive loss and recorded in discontinued operations in the Company’s consolidated statements of operations in the quarter and year of de-designation.
Interest Rate Risk - Fair Value Hedge
The Company hashad a fixed-to-floating interest rate swap agreement (the “Swap”) with a notional amount of $45,000 to hedge its exposure to fair value fluctuations on a portion of its senior secured notes. The Swap was designated as a fair value hedge of the fixed interest rate obligation under the Company’s $175,000 9.5% senior secured notes due October 15, 2017. The critical terms of the Swap arewere aligned with the terms of the senior secured notes, including maturity of October 15, 2017, resulting in no hedge ineffectiveness. The unrealized gain or loss for the effective portion of the hedge iswas deferred and reported in the Company’s consolidated balance sheets as an asset or liability, as applicable, with the offset to the carrying value of the senior secured notes.
Under the Swap, the Company payspaid a variable interest rate equal to the six-month London Interbank Offered Rate (“LIBOR”) plus 7.2% and it receivesreceived a fixed interest rate of 9.5%. The Swap requiresrequired semi-annual settlements on April 15 and October 15. The difference between amounts to be received and paid under the Swap iswas recognized as a component of interest expense, net on the consolidated statements of operations.
64 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
In connection with the Company’s notice of redemption issued on September 15, 2014 to redeem all remaining outstanding senior notes, the interest rate fair value hedge was de-designated on that date. On October 23, 2014, the Company terminated the interest rate swap resulting in a gain of $371 recorded in other expense (income), net on the consolidated statement of operations in the fourth quarter of 2014.
The Swap reduced interest expense by $641, $810 $736 and $473$736 for the years ended December 31, 2014, 2013 and 2012, respectively.
The notional amounts and 2011, respectively.fair values of derivative instruments in the consolidated balance sheets were as follows:
Prepaid expenses | ||||||||||||||||||||||||
and other current assets / | Accrued expenses and | |||||||||||||||||||||||
Notional Amounts(A) | other long-term assets | other current liabilities | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||
Derivatives designated as hedging instruments | ||||||||||||||||||||||||
Cash Flow Hedges: | ||||||||||||||||||||||||
Forward currency contracts | $ | 26,267 | $ | 45,000 | $ | 479 | $ | - | $ | 478 | $ | 263 | ||||||||||||
Fixed price commodity contracts | - | 1,582 | - | $ | 152 | - | - | |||||||||||||||||
Fair Value Hedge: | ||||||||||||||||||||||||
Interest rate swap contract | - | $ | 45,000 | - | $ | 793 | - | - | ||||||||||||||||
Derivatives not designated as hedging instruments | ||||||||||||||||||||||||
Forward currency contracts | $ | 3,523 | $ | 13,335 | - | - | $ | 13 | $ | 18 | ||||||||||||||
Fixed price commodity contracts | 317 | - | - | - | $ | 69 | - |
(A) | Notional amounts represent the gross contract / notional amount of the derivatives outstanding. The fixed price commodity contract notional amounts are in pounds. |
Amounts recorded for the cash flow hedges in other comprehensive income (loss) in shareholders’ equity and in net income (loss) for the years ended December 31 were as follows:
Gain (loss) reclassified from | ||||||||||||||||||||||||
Gain (loss) recorded in other | other comprehensive income | |||||||||||||||||||||||
comprehensive income (loss) | (loss) into net income | |||||||||||||||||||||||
2014 | 2013 | 2012 | 2014 | 2013 | 2012 | |||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||
Forward currency contracts | $ | (46 | ) | $ | 683 | $ | 5,717 | $ | (310 | ) | $ | 2,746 | $ | (241 | ) | |||||||||
Fixed price commodity contracts | (408 | ) | (1,008 | ) | 1,389 | (256 | ) | (820 | ) | (2,515 | ) | |||||||||||||
Total derivatives designated as cash flow hedges | $ | (454 | ) | $ | (325 | ) | $ | 7,106 | $ | (566 | ) | $ | 1,926 | $ | (2,756 | ) |
Gains and losses reclassified from comprehensive income (loss) into net income (loss) were recognized in cost of goods sold in the Company’s consolidated statements of operations.
65 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The notional amounts and fair values of derivative instruments in the consolidated balance sheets were as follows:
Notional amounts(A) | Prepaid expenses and other current assets / other long-term assets | Accrued expenses and other current liabilities | ||||||||||||||||||||||
December 31, | December 31, | December 31, | ||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||||
Derivatives designated as hedging instruments: | ||||||||||||||||||||||||
Cash Flow Hedges: | ||||||||||||||||||||||||
Forward currency contracts | $ | 45,000 | $ | 36,500 | $ | - | $ | 1,800 | $ | 263 | $ | - | ||||||||||||
Fixed price commodity contracts | 1,582 | 2,436 | 152 | 340 | - | - | ||||||||||||||||||
Fair Value Hedge: | ||||||||||||||||||||||||
Interest rate swap contract | $ | 45,000 | $ | 45,000 | $ | 793 | $ | 2,212 | $ | - | $ | - | ||||||||||||
Derivatives not designated as hedging instruments: | ||||||||||||||||||||||||
Forward currency contracts | $ | 13,335 | $ | 12,643 | $ | - | $ | - | $ | 18 | $ | 191 | ||||||||||||
(A) Notional amounts represent the gross contract / notional amount of the derivatives outstanding.
Amounts recorded for the cash flow hedges in other comprehensive income (loss) in shareholders’ equity and in net income for the years ended December 31 were as follows:
Gain (loss) reclassified from | ||||||||||||||||||||||||
Gain (loss) recorded in other | other comprehensive income | |||||||||||||||||||||||
comprehensive income (loss) | (loss) into net income | |||||||||||||||||||||||
2013 | 2012 | 2011 | 2013 | 2012 | 2011 | |||||||||||||||||||
Derivatives designated as cash flow hedges: | ||||||||||||||||||||||||
Forward currency contracts | $ | 683 | $ | 5,717 | $ | (7,118 | ) | $ | 2,746 | $ | (241 | ) | $ | (2,960 | ) | |||||||||
Fixed price commodity contracts | (1,008 | ) | 1,389 | (4,686 | ) | (820 | ) | (2,515 | ) | (1,122 | ) | |||||||||||||
Total derivatives designated as cash flow hedges | $ | (325 | ) | $ | 7,106 | $ | (11,804 | ) | $ | 1,926 | $ | (2,756 | ) | $ | (4,082 | ) |
Gains and losses reclassified from comprehensive income (loss) into net income were recognized in cost of goods sold in the Company’s consolidated statements of operations.
The net deferred lossesgains of $111$1 on the cash flow hedge derivatives will be reclassified from other comprehensive income (loss) to the consolidated statements of operations in 2014.2015. The Company has measured the ineffectiveness of the forward currency and commodity contracts and any amounts recognized in the consolidated financial statements were immaterial for the years ended December 31, 2014, 2013 2012 and 2011.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)2012.
Fair Value Measurements
The following table presents our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.
December 31, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||||||||||||||
2013 | 2012 | 2014 | 2013 | |||||||||||||||||||||||||||||||||||||
Fair value estimated using | Fair value estimated using | |||||||||||||||||||||||||||||||||||||||
Fair value | Level 1 inputs(A) | Level 2 inputs(B) | Level 3 inputs(C) | Fair value | Fair value | Level 1 inputs(A) | Level 2 inputs(B) | Level 3 inputs(C) | Fair value | |||||||||||||||||||||||||||||||
Financial assets carried at fair value: | ||||||||||||||||||||||||||||||||||||||||
Interest rate swap contract | $ | 793 | $ | - | $ | 793 | $ | - | $ | 2,212 | $ | - | $ | - | $ | - | $ | - | $ | 793 | ||||||||||||||||||||
Forward currency contracts | - | - | - | - | 1,800 | 479 | - | 479 | - | - | ||||||||||||||||||||||||||||||
Fixed price commodity contracts | 152 | - | 152 | - | 340 | - | - | - | - | 152 | ||||||||||||||||||||||||||||||
Total financial assets carried at fair value | $ | 945 | $ | - | $ | 945 | $ | - | $ | 4,352 | $ | 479 | $ | - | $ | 479 | $ | - | $ | 945 | ||||||||||||||||||||
Financial liabilities carried at fair value: | ||||||||||||||||||||||||||||||||||||||||
Forward currency contracts | $ | 281 | $ | - | $ | 281 | $ | - | $ | 191 | $ | 491 | $ | - | $ | 491 | $ | - | $ | 281 | ||||||||||||||||||||
Fixed price commodity contracts | 69 | - | 69 | - | - | |||||||||||||||||||||||||||||||||||
Total financial liabilities carried at fair value | $ | 281 | $ | - | $ | 281 | $ | - | $ | 191 | $ | 560 | $ | - | $ | 560 | $ | - | $ | 281 |
(A) | Fair values estimated using Level 1 inputs, which consist of quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. The Company did not have any fair value estimates using Level 1 inputs at December 31, |
(B) | Fair values estimated using Level 2 inputs, other than quoted prices, that are observable for the asset or liability, either directly or indirectly and include among other things, quoted prices for similar assets or liabilities in markets that are active or inactive as well as inputs other than quoted prices that are observable. For forward currency, fixed price commodity and interest rate swap contracts, inputs include foreign currency exchange rates, commodity indexes and the six-month forward LIBOR. |
(C) | Fair values estimated using Level 3 inputs consist of significant unobservable inputs. The Company did not have any recurring fair value estimates using Level 3 inputs at December 31, |
ForThe Company recorded a non-recurring fair value adjustment of $51,458 related to the PST goodwill during the year ended December 31, 2011, the Company recorded a fair value adjustment of $4,945 related to the BCS goodwill.2014. The Company utilized Level 3 inputs to estimate the fair value adjustment for nonfinancial assets. For additional information, see the discussion of Goodwill and Other Intangible Assets in Note 2. No adjustments to fair value were required for nonfinancial assets for the years ended December 31, 2013 or 2012.
10. Commitments and Contingencies
In the ordinary course of business, the Company is subject to variousa broad range of claims and legal proceedings workers’ compensation andthat relate to contractual allegations, tax audits, patent infringement, product liability, disputes. Theemployment-related matters and environmental matters. Although it is not possible to predict with certainty the outcome of these matters, the Company is of the opinion that the ultimate resolution of these matters will not have a material adverse affecteffect on theits consolidated results of operations cash flows or the financial position of the Company.position.
66 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
As a result of environmental studies performed at the Company’s former facility located in Sarasota, Florida, the Company became aware of soil and groundwater contamination at the Company site. The Company engaged an environmental engineering consultant to assess the level of contamination and to develop a remediation and monitoring plan for the site. Soil remediation at the site was completed during the year ended December 31, 2010. Ground water remediation will begin in the first quarter of 2014, in accordance with a2015, as the remedial action plan has been approved by the Florida Department of Environmental Protection. During the years ended December 31, 2014, 2013 and 2012, environmental remediation costs incurred were immaterial. At December 31, 20132014 and 2012,2013, the Company had accrued an undiscounted liability of $944$876 and $1,340,$944, respectively, related to future remediation. The decrease in the accrual is related to changes in assumptions used in the remedial action plan. At December 31, 2014 and 2013, $813 and 2012, $683, and $733, respectively, were recorded as a component of accrued expenses and other current liabilities on the consolidated balance sheets while the remaining amounts were recorded as a component of other long-term liabilities. A majority of the costs associated with the recorded liability will be incurred at the start of the groundwater remediation, with the balance relating to monitoring costs to be incurred over multiple years. The recorded liability is based on assumptions in the remedial action plan. In December 2011,Although the Company sold the Sarasota facility and related property. However,in December 2011, the liability to remediate the site contamination remains the responsibility of the Company. Due to the ongoing site remediation, the closing terms of the sale agreement included a requirement for the Company to maintain a $2,000 letter of credit for the benefit of the buyer.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In September 2013, a legal proceeding was initiated by Actia Automotive (“Actia”) in thousands, except sharea French court (the tribunal de grande instance de Paris) alleging infringement of its patents by the Company’s Electronics segment. The euro (“€”) and per share data, unless otherwise indicated)U.S. dollar equivalent (“$”) that Actia is seeking is €14,000 ($16,937) for injunctive relief and monetary damages resulting from such alleged infringement. The Company believes that its products did not infringe on any of the patents claimed by Actia, and the claim is without merit. Therefore it is vigorously defending itself against these allegations. The Company believes the likelihood of loss is not probable. As such, no liability has been recorded for this claim. There have been no significant changes to the facts and circumstances related to this claim during the year ended December 31, 2014.
On May 24, 2013, the State Revenue Services of São Paulo issued a tax deficiency notice against PST our 74% owned consolidated subsidiary, claiming that the vehicle tracking and monitoring services it provides should be classified as communication services, and therefore subject to the State Value Added Tax – ICMS. The State Revenue Services assessment imposed the 25.0% ICMS tax on all revenues of PST related to the vehicle tracking and monitoring services during the period from January 2009 through December 2010. The Brazilian real (“R$”) and (U.S.U.S. dollar equivalent “$(“$”) of the aggregate tax assessment is approximately R$92,500 ($39,500)34,800) which is comprised of Value Added Tax – ICMS of R$13,200 ($5,600)5,000), interest of R$11,400 ($4,900)4,300) and penalties of R$67,900 ($29,000)25,500).
The Company’sCompany believes that the vehicle tracking and monitoring services are non-communication services, as defined under Brazilian tax law, subject to the municipal ISS tax, not communication services subject to state ICMS tax as claimed by the State Revenue Services of São Paulo. PST has, and will continue to collect the municipal ISS tax on the vehicle tracking and monitoring services in compliance with Brazilian tax law and will defend its tax position. PST has received a legal opinion that the merits of the case are favorable to PST, determining among other things that the imposition on the subsidiary of the State ICMS by the State Revenue Services of São Paulo is not in accordance with the Brazilian tax code. Management believes, based on the legal opinion of PST’sthe Company’s Brazilian legal counsel and the results of the Brazil Administrative Court's ruling in favor of another vehicle tracking and monitoring company related to the tax deficiency notice it received, the likelihood of loss is not probable although it may take years to resolve. As a result of the above, as of December 31, 2014 and 2013, no provisionaccrual has been maderecorded with respect to this tax assessment. An unfavorable judgment on this issue for the years assessed and for subsequent years could result in significant costs to PST and adversely affect its results of operations. There have been no significant changes to the facts and circumstances related to this notice for the year ended December 31, 2014.
In addition, PST has civil, labor and tributaryother tax contingencies for which the likelihood of loss is deemed to be reasonably possible, but not probable, by itsthe Company’s legal advisors.advisors in Brazil. As a result, no provision has been maderecorded with respect to these contingencies, which amount to $11,469R$37,237 ($14,019) and $11,925R$26,867 ($11,469) at December, 20132014 and 2012,2013, respectively. An unfavorable outcome on this issuethese contingencies could result in significant cost to PST and adversely affect its results of operations.
11. Restructuring
On October 29, 2007, the Company announced a restructuring initiativesinitiative to improve manufacturing efficiency and cost position by ceasing manufacturing operations at its Sarasota, Florida (Control Devices reportable segment) and Mitcheldean, United Kingdom (Electronics reportable segment) locations.location. During 2008 and 2009, in response to the depressed conditions in the North American and European commercial and automotive vehicle markets, the Company continued and expanded the restructuring initiatives in the Control Devices and Electronics reportable segments. While the initiatives were completed in 2009 in regards to the Control Devices reportable segment, insegment. In 2010, the Company continued restructuring initiatives within the Electronics reportable segment and recorded amounts related to its cancelledterminated property lease in Mitcheldean, United Kingdom. During the third quarter of 2012, the Company finalized a settlement agreement to modify the terms of and the obligation associated with the property consistent with previous estimates.
As a result of the restructuring plan approved on October 29, 2007, the manufacturing facility located
67 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in Sarasota, Florida was closed in 2008. During the year ended December 31, 2011, the Company sold the facilitythousands, except share and recognized a gain of $95 as a component of selling, general and administrative expense.per share data, unless otherwise indicated)
In connection with the Electronics segment restructuring initiative, the Company recorded lease related restructuring charges during the yearyears ended December 31, 2014, 2013 and 2012 of $494, $469 and $256, respectively, as part of selling, general and administrative expense. At December 31, 20132014 and 2012,2013, the only remaining restructuring related accrual relates to the cancelledterminated property lease in Mitcheldean, United Kingdom, for which the Company has accrued $780$733 and $765,$780, respectively, on the consolidated balance sheets of which $427$402 and $419,$427, respectively, is a component of other long-term liabilities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
The expenses related to the restructuring activities that belong to the Electronics reportable segment include the following:
Contract | ||||
termination costs | ||||
Accrued balance at January 1, 2011 | $ | 1,117 | ||
2011 charge to expense | 951 | |||
Foreign currency translation effect | (148 | ) | ||
Cash payments | - | |||
Accrued balance at December 31, 2011 | 1,920 | |||
2012 charge to expense | 256 | |||
Foreign currency translation effect | 172 | |||
Cash payments | (1,583 | ) | ||
Accrued balance at December 31, 2012 | 765 | |||
2013 charge to expense | 469 | |||
Foreign currency translation effect | 24 | |||
Cash payments | (478 | ) | ||
Accrued balance at December 31, 2013 | $ | 780 |
2014 | 2013 | 2012 | ||||||||||
Accrued balance at January 1 | $ | 780 | $ | 765 | $ | 1,920 | ||||||
Charge to expense | 494 | 469 | 256 | |||||||||
Foreign currency translation | (45 | ) | 24 | 172 | ||||||||
Cash payments | (496 | ) | (478 | ) | (1,583 | ) | ||||||
Accrued balance at December 31 | $ | 733 | $ | 780 | $ | 765 |
There were no significant restructuring expenses related to the Wiring or Control Devices reportable segmentssegment during the years ended December 31, 2014, 2013 2012 or 2011.2012.
In response to a change in customer demand, the PST segment incurred and paid business realignment charges of $1,646$1,578 for the year ended December 31, 2012,2014, of which $729$847 was recorded in cost of goods sold, with the remainder recorded$559 in selling, general and administrative expenses.expenses and the remainder in design and development costs. The charges consist primarily of severance costs related to workforce reductions. There were no restructuring expenses related to the PST segment during the year ended December 31, 2013.
Contract termination costs represent costs associated with long-term lease obligations that Business realignment charges were cancelled as part$1,646 for the year ended December 31, 2012, of which $729 was recorded in cost of goods sold, $579 in selling, general and administrative expenses and the restructuring initiatives.remainder in design and development costs.
12. Segment Reporting
Operating segments are defined as components of an enterprise that are evaluated regularly by the Company’sCompany's chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’sCompany's chief operating decision maker is the chief executive officer.
During the third quarter of 2014 the Company sold its Wiring business segment, which designed and manufactured wiring harness products and assembled instrument panels for sale principally to the commercial, agricultural and off-highway vehicle markets. As such, for all periods presented the Company reported this business as discontinued operations in the Company’s consolidated financial statements and therefore excluded it from the segment disclosures herein. See Note 2 for additional details.
The Company has fourthree reportable segments:segments, Control Devices, Electronics Wiring and PST, which also representsrepresent its operating segments. The Control Devices reportable segment produces sensors, switches, valves and actuators. The Electronics reportable segment produces electronic instrument clusters, electronic control units and driver information systems. The Wiring reportable segment produces electrical power and signal distribution systems, primarily wiring harnesses and connectors and instrument panel assemblies. The PST reportable segment specializes in the design, manufacturedesigns and sale ofmanufactures electronic vehicle security alarms, convenience accessories, vehicle tracking devices and monitoring services and in-vehicle audio and video devices.
Also, during the first half of 2014 the Company changed its segment operating performance metric in accordance with changes in the financial information reviewed and performance measured by the Company’s chief operating decision maker. As a result, the Company now uses operating income for financial reporting purposes. Historically, the Company used income before income taxes. The Company has revised the consolidated segment information for all periods presented to reflect this presentation.
The accounting policies of the Company’s reportable segments are the same as those described in Note 2. The Company’s management evaluates the performance of its reportable segments based primarily on revenues from external customers, capital expenditures and income before income taxes.operating income. Inter-segment sales are accounted for on terms similar to those to third parties and are eliminated upon consolidation.
68 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
A summary of financial information by reportable segment is as follows:
Years ended December 31 | 2013 | 2012 | 2011 | |||||||||
Net Sales: | ||||||||||||
Control Devices | $ | 291,145 | $ | 267,859 | $ | 259,315 | ||||||
Inter-segment sales | 2,875 | 3,906 | 3,619 | |||||||||
Control Devices net sales | 294,020 | 271,765 | 262,935 | |||||||||
Electronics | 189,809 | 164,196 | 180,508 | |||||||||
Inter-segment sales | 41,137 | 51,857 | 58,029 | |||||||||
Electronics net sales | 230,946 | 216,053 | 238,537 | |||||||||
Wiring | 288,344 | 326,048 | 325,549 | |||||||||
Inter-segment sales | 7,593 | 3,783 | 2,825 | |||||||||
Wiring net sales | 295,937 | 329,831 | 328,374 | |||||||||
PST(A) | 178,532 | 180,410 | - | |||||||||
Inter-segment sales | - | - | - | |||||||||
PST net sales | 178,532 | 180,410 | - | |||||||||
Eliminations | (51,605 | ) | (59,546 | ) | (64,473 | ) | ||||||
Total net sales | $ | 947,830 | $ | 938,513 | $ | 765,373 | ||||||
Income (Loss) Before Income Taxes: | ||||||||||||
Control Devices | $ | 26,914 | $ | 15,048 | $ | 17,145 | ||||||
Electronics | 15,596 | 10,049 | 14,743 | |||||||||
Wiring | (10,074 | ) | (289 | ) | (17,119 | ) | ||||||
PST(A) | 5,395 | (4,985 | ) | - | ||||||||
PST - equity in earnings of investee(A) | - | - | 8,805 | |||||||||
Other corporate activities(A) | (1,117 | ) | 635 | 63,461 | ||||||||
Corporate interest expense | (15,980 | ) | (15,898 | ) | (15,393 | ) | ||||||
Total income before income taxes | $ | 20,734 | $ | 4,560 | $ | 71,642 | ||||||
Depreciation and Amortization: | ||||||||||||
Control Devices | $ | 9,877 | $ | 9,137 | $ | 9,270 | ||||||
Electronics | 4,800 | 4,467 | 5,174 | |||||||||
Wiring | 4,978 | 5,054 | 4,442 | |||||||||
PST(A) | 14,426 | 15,613 | - | |||||||||
Corporate | 183 | 188 | 199 | |||||||||
Total depreciation and amortization (B) | $ | 34,264 | $ | 34,459 | $ | 19,085 | ||||||
Interest Expense, net: | ||||||||||||
Control Devices | $ | 182 | $ | 254 | $ | 144 | ||||||
Electronics | 760 | 1,342 | 1,619 | |||||||||
Wiring | 250 | 164 | 78 | |||||||||
PST(A) | 1,174 | 2,375 | - | |||||||||
Corporate | 15,980 | 15,898 | 15,393 | |||||||||
Total interest expense, net | $ | 18,346 | $ | 20,033 | $ | 17,234 | ||||||
Capital Expenditures: | ||||||||||||
Control Devices | $ | 9,906 | $ | 9,574 | $ | 10,368 | ||||||
Electronics | 4,667 | 2,841 | 6,148 | |||||||||
Wiring | 3,768 | 3,251 | 9,740 | |||||||||
PST(A) | 6,663 | 9,102 | - | |||||||||
Corporate | 340 | 1,584 | 34 | |||||||||
Total capital expenditures | $ | 25,344 | $ | 26,352 | $ | 26,290 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Years ended December 31 | 2014 | 2013 | 2012 | |||||||||
Net Sales: | ||||||||||||
Control Devices | $ | 306,658 | $ | 291,145 | $ | 267,860 | ||||||
Inter-segment sales | 3,080 | 2,875 | 3,905 | |||||||||
Control Devices net sales | 309,738 | 294,020 | 271,765 | |||||||||
Electronics | 214,141 | 189,809 | 164,196 | |||||||||
Inter-segment sales | 35,163 | 41,137 | 51,857 | |||||||||
Electronics net sales | 249,304 | 230,946 | 216,053 | |||||||||
PST | 139,780 | 178,532 | 180,410 | |||||||||
Inter-segment sales | - | - | - | |||||||||
PST net sales | 139,780 | 178,532 | 180,410 | |||||||||
Eliminations | (38,243 | ) | (44,012 | ) | (55,762 | ) | ||||||
Total net sales | $ | 660,579 | $ | 659,486 | $ | 612,466 | ||||||
Operating Income (Loss): | ||||||||||||
Control Devices | $ | 35,387 | $ | 32,331 | $ | 20,945 | ||||||
Electronics | 17,444 | 20,732 | 15,851 | |||||||||
PST(A) | (59,587 | ) | 7,211 | 583 | ||||||||
Unallocated Corporate(B) | (19,067 | ) | (17,871 | ) | (17,474 | ) | ||||||
Total operating income (loss) | $ | (25,823 | ) | $ | 42,403 | $ | 19,905 | |||||
Depreciation and Amortization: | ||||||||||||
Control Devices | $ | 9,545 | $ | 9,877 | $ | 9,119 | ||||||
Electronics | 4,432 | 4,800 | 4,485 | |||||||||
PST | 12,998 | 14,426 | 15,613 | |||||||||
Corporate | 130 | 183 | 188 | |||||||||
Total depreciation and amortization (C) | $ | 27,105 | $ | 29,286 | $ | 29,405 | ||||||
Interest Expense, net: | ||||||||||||
Control Devices | $ | 303 | $ | 182 | $ | 254 | ||||||
Electronics | 695 | 760 | 1,342 | |||||||||
PST | 2,764 | 1,174 | 2,375 | |||||||||
Corporate | 13,118 | 15,980 | 15,898 | |||||||||
Total interest expense, net | $ | 16,880 | $ | 18,096 | $ | 19,869 | ||||||
Capital Expenditures: | ||||||||||||
Control Devices | $ | 13,658 | $ | 9,906 | $ | 8,788 | ||||||
Electronics | 3,541 | 4,667 | 3,435 | |||||||||
PST | 6,161 | 6,663 | 9,102 | |||||||||
Corporate | 156 | 340 | 1,584 | |||||||||
Total capital expenditures | $ | 23,516 | $ | 21,576 | $ | 22,909 |
As of December 31 | 2013 | 2012 | ||||||
Total Assets: | ||||||||
Control Devices | $ | 105,730 | $ | 100,351 | ||||
Electronics | 105,352 | 84,772 | ||||||
Wiring | 98,180 | 99,755 | ||||||
PST | 237,649 | 267,687 | ||||||
Corporate(C) | 308,167 | 308,969 | ||||||
Eliminations | (266,756 | ) | (268,843 | ) | ||||
Total assets | $ | 588,322 | $ | 592,691 |
As of December 31 | 2014 | 2013 | ||||||
Total Assets: | ||||||||
Control Devices | $ | 115,703 | $ | 105,730 | ||||
Electronics | 95,140 | 105,352 | ||||||
PST | 159,980 | 237,649 | ||||||
Corporate(D) | 279,013 | 301,889 | ||||||
Eliminations | (251,085 | ) | (259,267 | ) | ||||
Total assets | $ | 398,751 | $ | 491,353 |
The following table presents net sales and long-term assets for the geographic areas in which the Company operates:
Years ended December 31 | 2013 | 2012 | 2011 | |||||||||
Net Sales: | ||||||||||||
North America | $ | 594,854 | $ | 611,756 | $ | 601,490 | ||||||
South America | 178,532 | 180,410 | - | |||||||||
Europe and Other | 174,444 | 146,347 | 163,883 | |||||||||
Total net sales | $ | 947,830 | $ | 938,513 | $ | 765,373 |
December 31, | December 31, | |||||||
2013 | 2012 | |||||||
Long-term Assets: | ||||||||
North America | $ | 79,219 | $ | 82,777 | ||||
South America | 154,226 | 185,109 | ||||||
Europe and Other | 14,641 | 13,751 | ||||||
Total long-term assets | $ | 248,086 | $ | 281,637 |
69 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
(A) | The PST operating loss for the year ended December 31, 2014 includes a goodwill impairment charge of $51,458. | |
(B) | Unallocated Corporate expenses include, among other items, accounting, finance, legal, information technology costs as well as share-based compensation. | |
(C) | These amounts represent depreciation and amortization on property, plant and equipment and certain intangible assets. | |
(D) | Assets located at Corporate consist primarily of cash, intercompany loan receivables, equity investments and investments in subsidiaries. |
The following table presents net sales and long-term assets for the geographic areas in which the Company operates:
Years ended December 31 | 2014 | 2013 | 2012 | |||||||||
Net Sales: | ||||||||||||
North America | $ | 330,516 | $ | 301,592 | $ | 277,850 | ||||||
South America | 139,780 | 178,532 | 180,410 | |||||||||
Europe and Other | 190,283 | 179,362 | 154,206 | |||||||||
Total net sales | $ | 660,579 | $ | 659,486 | $ | 612,466 |
As of December 31 | 2014 | 2013 | ||||||
Long-term Assets: | ||||||||
North America | $ | 53,406 | $ | 49,853 | ||||
South America | 85,433 | 154,226 | ||||||
Europe and Other | 14,401 | 14,641 | ||||||
Total long-term assets | $ | 153,240 | $ | 218,720 |
13. Unaudited Quarterly Financial Data
The following is a summary of quarterly results of operations:
Quarter ended | ||||||||||||||||
2013 | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Net sales | $ | 235,824 | $ | 233,511 | $ | 242,785 | $ | 235,710 | ||||||||
Gross profit | 53,553 | 53,519 | 60,220 | 58,729 | ||||||||||||
Operating income | 6,882 | 10,705 | 11,825 | 10,292 | ||||||||||||
Provision for income taxes | 1,066 | 1,016 | 1,125 | 1,019 | ||||||||||||
Net income | 321 | 5,513 | 6,391 | 4,283 | ||||||||||||
Net income attributable to noncontrolling interests | 117 | 466 | 634 | 160 | ||||||||||||
Net income attributable to Stoneridge, Inc. | 204 | 5,047 | 5,757 | 4,123 | ||||||||||||
Earnings per share attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | 0.01 | 0.19 | 0.22 | 0.15 | ||||||||||||
Diluted(A) | 0.01 | 0.19 | 0.21 | 0.15 |
Quarter ended | ||||||||||||||||
2014 | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Net sales | $ | 166,811 | $ | 170,338 | $ | 162,099 | $ | 161,331 | ||||||||
Gross profit | 44,901 | 49,550 | 48,285 | 48,138 | ||||||||||||
Operating income (loss)(B) | (22,795 | ) | 13,759 | (23,221 | ) | 6,434 | ||||||||||
Provision (benefit) for income taxes | (1,066 | ) | (1,174 | ) | 90 | 294 | ||||||||||
Income (loss) from continuing operations(C) | (31,306 | ) | 9,138 | (28,569 | ) | (467 | ) | |||||||||
Income (loss) from discontinued operations(D) | (1,692 | ) | (8,108 | ) | (544 | ) | 957 | |||||||||
Net income (loss)(B) (C) | (32,998 | ) | 1,030 | (29,113 | ) | 490 | ||||||||||
Net income (loss) attributable to noncontrolling interests(B) | (6,444 | ) | 1,160 | (7,221 | ) | (978 | ) | |||||||||
Net income (loss) attributable to Stoneridge, Inc.(B) (C) | $ | (26,554 | ) | $ | (130 | ) | $ | (21,892 | ) | $ | 1,468 | |||||
Earnings (loss) per share from continuing operations attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | $ | (0.92 | ) | $ | 0.30 | $ | (0.79 | ) | $ | 0.02 | ||||||
Diluted(A) | $ | (0.92 | ) | $ | 0.29 | $ | (0.79 | ) | $ | 0.02 | ||||||
Earnings (loss) per share attributable to discontinued operations: | ||||||||||||||||
Basic(A) | $ | (0.07 | ) | $ | (0.30 | ) | $ | (0.02 | ) | $ | 0.03 | |||||
Diluted(A) | $ | (0.07 | ) | $ | (0.29 | ) | $ | (0.02 | ) | $ | 0.03 | |||||
Earnings (loss) per share attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | $ | (0.99 | ) | $ | 0.00 | $ | (0.81 | ) | $ | 0.05 | ||||||
Diluted(A) | $ | (0.99 | ) | $ | 0.00 | $ | (0.81 | ) | $ | 0.05 |
Quarter ended | ||||||||||||||||
2012 | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Net sales | $ | 222,725 | $ | 219,256 | $ | 234,265 | $ | 262,267 | ||||||||
Gross profit | 54,609 | 51,238 | 53,659 | 65,138 | ||||||||||||
Operating income | 8,648 | 6,615 | 1,617 | 11,849 | ||||||||||||
Provision (benefit) for income taxes | 95 | 383 | (884 | ) | 1,218 | |||||||||||
Net income (loss) | 2,711 | 589 | (5,298 | ) | 5,746 | |||||||||||
Net income (loss) attributable to noncontrolling interests | 90 | 170 | (1,740 | ) | (133 | ) | ||||||||||
Net income (loss) attributable to Stoneridge, Inc. | 2,621 | 419 | (3,558 | ) | 5,879 | |||||||||||
Earnings per share attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | 0.10 | 0.02 | (0.13 | ) | 0.22 | |||||||||||
Diluted(A) | 0.10 | 0.02 | (0.13 | ) | 0.22 |
70 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
Quarter ended | ||||||||||||||||
2013 | December 31 | September 30 | June 30 | March 31 | ||||||||||||
Net sales | $ | 169,235 | $ | 161,556 | $ | 169,833 | $ | 158,862 | ||||||||
Gross profit | 50,643 | 49,729 | 54,303 | 51,280 | ||||||||||||
Operating income | 9,558 | 12,602 | 11,752 | 8,491 | ||||||||||||
Provision for income taxes | 537 | 794 | 775 | 691 | ||||||||||||
Income from continuing operations | 3,489 | 7,459 | 6,413 | 3,168 | ||||||||||||
Income (loss) from discontinued operations | (3,168 | ) | (1,946 | ) | (22 | ) | 1,115 | |||||||||
Net income | 321 | 5,513 | 6,391 | 4,283 | ||||||||||||
Net income attributable to noncontrolling interests | 117 | 466 | 634 | 160 | ||||||||||||
Net income attributable to Stoneridge, Inc. | $ | 204 | $ | 5,047 | $ | 5,757 | $ | 4,123 | ||||||||
Earnings per share from continuing operations attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | $ | 0.13 | $ | 0.26 | $ | 0.22 | $ | 0.11 | ||||||||
Diluted(A) | $ | 0.12 | $ | 0.26 | $ | 0.21 | $ | 0.11 | ||||||||
Earnings (loss) per share attributable to discontinued operations: | ||||||||||||||||
Basic(A) | $ | (0.12 | ) | $ | (0.07 | ) | $ | 0.00 | $ | 0.04 | ||||||
Diluted(A) | $ | (0.11 | ) | $ | (0.07 | ) | $ | 0.00 | $ | 0.04 | ||||||
Earnings per share attributable to Stoneridge, Inc.: | ||||||||||||||||
Basic(A) | $ | 0.01 | $ | 0.19 | $ | 0.22 | $ | 0.15 | ||||||||
Diluted(A) | $ | 0.01 | $ | 0.19 | $ | 0.21 | $ | 0.15 |
(A) | Earnings per share for the year may not equal the sum of the four historical quarters earnings per share due to changes in weighted-average basic and diluted shares outstanding. |
(B) | Goodwill impairment of $29,300, $(5,802), and $27,960 related to the PST segment was recorded for the quarters ended June 30, 2014, September 30, 2014 and December 31, 2014, respectively, of which $6,436, $(1,274) and $6,142 was attributable to noncontrolling interest. |
(C) | In addition to the PST goodwill impairment amounts in item (B) herein, a loss on early extinguishment of debt of $920 and $9,687 was recorded for the quarters ended September 30, 2014 and December 31, 2014, respectively. |
(D) | A loss on disposal of the Wiring business was recorded for $1,138, $6,548 and $890 for the quarters ended June 30, 2014, September 30, 2014 and December 31, 2014, respectively. |
71 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data, unless otherwise indicated)
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at | Charged to | |||||||||||||||
beginning of | costs and | Balance at | ||||||||||||||
period | expenses | Write-offs | end of period | |||||||||||||
Accounts receivable reserves: | ||||||||||||||||
Year ended December 31, 2011 | $ | 2,013 | $ | 191 | $ | (719 | ) | $ | 1,485 | |||||||
Year ended December 31, 2012 | 1,485 | 3,415 | (1,506 | ) | 3,394 | |||||||||||
Year ended December 31, 2013 | 3,394 | 1,628 | (1,508 | ) | 3,514 |
The following schedules provide the activity for accounts receivable reserves and valuation allowance for deferred tax assets from continuing operations for the years ended December 31, 2014, 2013 and 2012:
Exchange | Balance at | Charged to | ||||||||||||||||||||||||||||||
Net additions | rate | beginning of | costs and | Balance at | ||||||||||||||||||||||||||||
Balance at | charged to | fluctuations | period | expenses | Write-offs | end of period | ||||||||||||||||||||||||||
beginning of | income | and other | Balance at | |||||||||||||||||||||||||||||
period | (expense) | items | end of period | |||||||||||||||||||||||||||||
Valuation allowance for deferred tax assets: | ||||||||||||||||||||||||||||||||
Year ended December 31, 2011 | $ | 74,940 | $ | 1,059 | $ | 2,212 | $ | 78,211 | ||||||||||||||||||||||||
Accounts receivable reserves: | ||||||||||||||||||||||||||||||||
Year ended December 31, 2012 | 78,211 | (2,842 | ) | (3,579 | ) | 71,790 | $ | 642 | $ | 2,721 | $ | (1,187 | ) | $ | 2,176 | |||||||||||||||||
Year ended December 31, 2013 | 71,790 | 453 | (416 | ) | 71,827 | 2,176 | 1,655 | (1,206 | ) | 2,625 | ||||||||||||||||||||||
Year ended December 31, 2014 | 2,625 | 619 | (1,227 | ) | 2,017 |
Exchange | ||||||||||||||||
Net additions | rate | |||||||||||||||
Balance at | charged to | fluctuations | ||||||||||||||
beginning of | income | and other | Balance at | |||||||||||||
period | (expense) | items | end of period | |||||||||||||
Valuation allowance for deferred tax assets: | ||||||||||||||||
Year ended December 31, 2012 | $ | 78,211 | $ | (2,842 | ) | $ | (3,579 | ) | $ | 71,790 | ||||||
Year ended December 31, 2013 | 71,790 | 453 | (416 | ) | 71,827 | |||||||||||
Year ended December 31, 2014 | 71,827 | (2,786 | ) | (1,134 | ) | 67,907 |
72 |
Item 9. Changes In and Disagreements With Accountants On Accounting and Financial Disclosure.
There have been no disagreements between the management of the Company and its Independent Registered Public Accounting Firm on any matter of accounting principles or practices of financial statement disclosures, or auditing scope or procedure.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of December 31, 2013,2014, an evaluation was performed under the supervision and with the participation of the Company’s management, including the principal executive officer (“PEO”) and principal financial officer (“PFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended. Based on that evaluation, the Company’s PEO and PFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2013.2014.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). In evaluating the Company’s internal control over financial reporting, management has adopted the framework inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992(2013 Framework). Under the supervision and with the participation of our management, including the PEO and PFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting, as of December 31, 2013.2014. Based on our evaluation under the framework in Internal Control-Integrated Framework(19922013 Framework), our management has concluded that our internal control over financial reporting was effective as of December 31, 2013.2014.
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20132014 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears herein.
Changes in Internal Control Over Financial Reporting
There were no changes to our internal controls over financial reporting during the quarter ended December 31, 20132014 that has materially or is reasonably likely to materially affect internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
Stoneridge, Inc. and Subsidiaries
We have audited Stoneridge, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2013,2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework)(2013 framework) (the COSO criteria). Stoneridge, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Stoneridge, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013,2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Stoneridge, Inc. and Subsidiaries as of December 31, 20132014 and 2012,2013, and the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows and shareholders’ equity for each of the three years in the period ended December 31, 20132014 of Stoneridge, Inc. and Subsidiaries and our report dated March 7, 201413, 2015 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Cleveland, Ohio
March 7, 201413, 2015
None.
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item 10 regarding our directors is incorporated by reference to the information under the sections and subsections entitled, “Proposal One: Election of Directors,” “Nominating and Corporate Governance Committee,” “Audit Committee,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance Guidelines” contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 6, 2014.12, 2015. The information required by this Item 10 regarding our executive officers appears as a Supplementary Item following Item 1 under Part I hereof.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference to the information under the sections and subsections “Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report” and “Executive Compensation” contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 6, 2014.12, 2015.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item 12 (other than the information required by Item 201(d) of Regulation S-K which is set forth below) is incorporated by reference to the information under the heading “Security Ownership of Certain Beneficial Owners and Management” contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 6, 2014.12, 2015.
In October 1997, we adopted a Long-Term Incentive Plan for our employees, which expired on June 30, 2007. In May 2002, we adopted a Director Share Option Plan for our directors. In April 2005, we adopted a Directors’ Restricted Shares Plan. In April 2006, we adopted an Amended and Restated Long-Term Incentive Plan. In May 2010, we adopted an Amended Directors’ Restricted Share Plan and an Amended and Restated Long-Term Incentive Plan, as amended. In May 2013, we adopted an Amended Directors’ Restricted Shares Plan and an Amended and Restated Long-Term Incentive Plan, as amended, to increase the number of shares available for issuance under the plans. Our shareholders approved each plan. Equity compensation plan information, as of December 31, 2013,2014, is as follows:
Number of securities to be issued upon the exercise of outstanding share options | Weighted-average exercise price of outstanding share options | Number of securities remaining available for future issuance under equity compensation plans (A) | ||||||||||
Equity compensation plans approved by shareholders | 20,000 | $ | 15.73 | 2,217,739 | ||||||||
Equity compensation plans not approved by shareholders | - | $ | - | - |
Number of securities to be issued upon the exercise of outstanding share options | Weighted-average exercise price of outstanding share options | Number of securities remaining available for future issuance under equity compensation plans (A) | ||||||||||
Equity compensation plans approved by shareholders | - | $ | - | 1,659,329 | ||||||||
Equity compensation plans not approved by shareholders | - | $ | - | - |
(A) | Excludes |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item 13 is incorporated by reference to the information under the sections and subsections “Transactions with Related Persons” and “Director Independence” contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 6, 2014.12, 2015.
Item 14. Principal Accounting Fees and Services.
The information required by this Item 14 is incorporated by reference to the information under the sections and subsections “Service Fees Paid to Independent Registered Accounting Firm” and “Pre-Approval Policy” contained in the Company's Proxy Statement in connection with its Annual Meeting of Shareholders to be held on May 6, 2014.12, 2015.
Item 15. Exhibits, Financial Statement Schedules.
(a) The following documents are filed as part of this Form 10-K.
(a) | The following documents are filed as part of this Form 10-K. |
Page in | ||
Form 10-K | ||
(1) | Consolidated Financial Statements: | |
Report of Independent Registered Public Accounting Firm | ||
Consolidated Balance Sheets as of December 31, | ||
Consolidated Statements of Operations for the Years Ended December 31, 2014, 2013 | ||
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2014, 2013 | ||
Consolidated Statements of Cash Flows for the Years Ended December 31, 2014, 2013 | ||
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2014, 2013 | ||
Notes to Consolidated Financial Statements | ||
(2) | Financial Statement Schedule: | |
Schedule II– Valuation and Qualifying Accounts | ||
(3) | Exhibits: | |
See the list of exhibits on the Index to Exhibits following the signature page. |
(b) The exhibits listed on the Index to Exhibits are filed as part of or incorporated by reference into this report.
(b) | The exhibits listed on the Index to Exhibits are filed as part of or incorporated by reference into this report. |
(c) | Additional Financial Statement Schedules. |
None. |
None.
76 |
Pursuant to the requirements of the Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STONERIDGE, INC. | |
Date: March | /s/ GEORGE E. STRICKLER |
George E. Strickler | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial and Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March | /s/ JOHN C. COREY |
John C. Corey | |
President, Chief Executive Officer and Director | |
(Principal Executive Officer) | |
Date: March | /s/ GEORGE E. STRICKLER |
George E. Strickler | |
Executive Vice President, Chief Financial Officer and Treasurer | |
(Principal Financial and Accounting Officer) | |
Date: March | /s/ WILLIAM M. LASKY |
William M. Lasky | |
Chairman of the Board of Directors | |
Date: March | /s/ JEFFREY P. DRAIME |
Jeffrey P. Draime | |
Director | |
Date: March | /s/ DOUGLAS C. JACOBS |
Douglas C. Jacobs | |
Director | |
Date: March | /s/ IRA C. KAPLAN |
Ira C. Kaplan | |
Director | |
Date: March | /s/ KIM KORTH |
Kim Korth | |
Director | |
Date: March | /s/ GEORGE S. MAYES, JR. |
George S. Mayes, Jr. | |
Director |
Date: March | /s/ PAUL J. SCHLATHER |
Paul J. Schlather | |
Director |
INDEX TO EXHIBITS
Exhibit Number | ||
Exhibit | ||
2.1 | Share Purchase Agreement, dated November 22, 2011, by and among Stoneridge, Inc., Marcos Ferretti, Adriana Campos De Cerqueira Leite, Alphabet do Brasil Ltda., PST Eletronica S.A., and Sergio De Cerqueira Leite (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on January 5, 2012). | |
2.2 | Asset Purchase Agreement, dated August 1, 2014, between Stoneridge, Inc. and Motherson Sumi Systems Ltd. (incorporated by reference to Exhibit 2.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). | |
2.3 | Amendedment No. 1 to the Asset Purchase Agreement, July 31, 2014, between Stoneridge, Inc. and Motherson Sumi Systems Ltd. (incorporated by reference to Exhibit 2.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2014). | |
3.1 | Second Amended and Restated Articles of Incorporation of the Company (incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999). | |
3.2 | Amended and Restated Code of Regulations of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). | |
4.1 | Common Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 1997). | |
10.1 | ||
Directors' Restricted Shares Plan (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 (No. 333-127017))*. | ||
Form of Directors' Restricted Shares Plan Agreement, (incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005)*. | ||
Employment Agreement between the Company and John C. Corey (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2006)*. | ||
Form of 2006 Directors’ Restricted Shares Plan Grant Agreement (incorporated by reference to Exhibit 99.4 to the Company’s Current Report on Form 8-K filed on July 26, 2006)*. | ||
Amended Annual Incentive Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on May 12, 2011)*. | ||
Amended and Restated Change in Control Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2007)*. |
Amended Employment Agreement between Stoneridge, Inc. and John C. Corey (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008)*. | ||
Amended and Restated Change in Control Agreement (incorporated by reference to Exhibit 10.32 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008)*. | ||
Form of Stoneridge, Inc. Long-Term Cash Incentive Plan – Grant Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009)*. |
Exhibit | Exhibit | |
Stoneridge, Inc. Long-Term Cash Incentive Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2009)*. | ||
Stoneridge, Inc. Officers’ and Key Employees’ Severance Plan (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on October 9, 2009)*. | ||
Stoneridge, Inc. Form of Indemnification Agreement between the Company and John C. Corey, George E. Strickler, Kenneth A. Kure and James E. Malcolm (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
Stoneridge, Inc. Amended and Restated Long-Term Incentive Plan – Form of 2010 Restricted Shares Grant Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)*. | ||
Stoneridge, Inc. Long-Term Cash Incentive Plan – Form of 2010 Phantom Share Grant Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010)*. | ||
Amended and Restated Long-Term Incentive Plan, as amended (incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-8 (No. 333-172002))*. | ||
Amended Directors’ Restricted Share Plan (incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-8 (No. 333-172002))*. |
First Amendment to the Stoneridge, Inc. Amended Directors' Restricted Shares Plan (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K filed on May 8, 2013)*. | ||
10.19 | Amended and Restated Change in Control Agreement (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on December 21, 2011)*. | |
10.20 | Third Amended and Restated Credit Agreement by and among Stoneridge, Inc. and certain of its subsidiaries as Borrowers; PNC Bank, National Association, as Agent, an Issuer and Lead Arranger; and PNC Bank, National Association, JPMorgan Chase Bank, N.A., Compass Bank, Citizens Bank, National Association, The Huntington National Bank, U.S. Bank National Association, BMO Harris Bank, N.A., First Niagara Bank, N.A. and First Commonwealth Bank, as lenders, dated September 12, 2014 (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on September 15, 2014)*. |
Exhibit Number | Exhibit | |
14.1 | Code of Ethics for Senior Financial Officers (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003). | |
21.1 | Principal Subsidiaries and Affiliates of the Company, filed herewith. | |
23.1 | Consent of Independent Registered Public Accounting Firm, | |
31.1 | Chief Executive Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
31.2 | Chief Financial Officer certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.1 | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
32.2 | Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith. | |
* - Reflects management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(b) of this Annual Report on Form 10-K. |